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Volume 8 - June 2012

SLQS Journal

The Forum of Sri Lankan Quantity Surveyors Across the Globe

Volume 8 June 2012

Editorial Committee
Dhammika T. Gamage

NDT(Civil Eng.), ICIOB, ACIArb, AAIQS, AIQS-SL, FIIE(SL), IEng, FACostE, FCInstCES

Lakshman Gunatilake GCGI, MBA (Sri J.), FCMI, FQSi, MCInstCES, ACIArb, MIIE(SL), IEng, PMP
Manju Sri Adikari BSc. (Hons), MRICS, MCIArb, MIIE (S.L.) I Eng, GCGI (UK)
Nishantha Fernando, BSc(QS) Hons, MRICS, MAA
Prasanna Pushpajith DipSurv., MSc, MRICS, ACIArb
Sudeera A. Widanage., BSc(QS) Hons, MRICS

Editorial Policy
We, the editorial committee reserve the right to select, reject, edit, and excerpt articles at our sole discretion. We will
publish no article which, in the opinion of the editorial committee, can be reasonably interpreted as insulting or offensive
to any individual or group. We will not return unsolicited manuscripts. The opinions expressed in articles contained in the
SLQS Journal are the opinions of individual authors and not necessarily those of the SLQS Journal editorial committee.
Articles are provided for the general interest of the quantity surveying and contract administration community, but the
information contained therein does not constitute legal advice and should not be relied on as such. Neither the SLQS nor
the individual authors assume any responsibility for the accuracy of information reported.
The editorial committee assumes no responsibility for failure to report any matter inadvertently omitted or withheld from
it. The mode of citation utilised within the articles and for the bibliography would be the Chicago method.
Email your own creations to journal@slqs-uae.org with your passport size photograph and brief profile of yourself which
should not be more than 35 words.

June 2012

SLQS JOURNAL
CONTENTS

Page

Editorial
Four Reasons for Adopting Adjudication Process in UK Construction Industry
Murugesu Sathiyaseelan LLM (with Merit), FRICS, MCIArb

Demystifying a Mechanism to Deal with Open Market Vacillations


Dr. Chandana Jayalath D.Sc, M.Sc, B.Sc (QS) Hons, PG Dip (Cons Mgt), PG Dip (Intl
Mediation), FRICS, FIQS (SL), MCIArb

Performance security and possible alternative mechanism for performance


security in the economic downturn
Sampath Marasinghege, B. Sc Hons (QS)

13

Why most UAE clients go for Lump Sum building contracts


S.M. Asanka Sanjaya Kumara, BSc (Hons), NCT(QS)

16

Letter of Intent (LoI) and its importance in the construction industry


C. J. Quickson BSc (Hons), LLM (Constr. Law & Arb) , AAIQS, MRICS, CCE, MCIArb

19

Internal Auditors are at Site!


Saman Jayasiri Sirisoma Welagedara, BSC (Hons) , MRICS

24

The Steps an Arbitrator should take before and During a Full Oral Hearing
Priyankara Premarathna, HND QS, ACIArb

27

Which Procurement Route?


Prasanna Jayaweera, B.Sc (Hons) QS, MRICS, CCC, ICIOB

31

On and Off Site Recoveries


Vajira Kosala Hettiarachchi

40

Prevention Principle
Senerath Wetthasinghe LL.M., AIQSSL, AAIQS, MQSi, FCIArb

46

Drafting a Construction Contract Agreement


Kidneswaran Kajanantha, B. Sc. in QS (Hons.), AAIQS, MRICS

52

SLQS JOURNAL

June 2012

Editorial
Dear Sri Lankan Quantity Surveyors,
As we start experiencing summers burn in the UAE, Europe and North America are being buffeted by the heat of
desperately flailing economic waves. The emerging BRICS economies are also about to experience theburn of the
same global economic waves, with India being the first of the member nations to feel the heat.The professionals
associated with the UAEs construction industry one of the most impacted by the global economic downturn cannot think of any easy shelter from this scorching heat. Therefore, we, as sound contract administrators, have a
duty to deliver with due diligence, in order to avoid any actions that could further worsen the existing crisis. On
that note, we hope the 2012 Olympics will bring a cooling breeze to the economic shores of the UK.
We are pleased that we managed to release the overdue 8th Volume of this journal and hope that it brings you as
much gratification as the ones preceding it.
Murugesu Sathiyaseelans promotion of the adoption of adjudicationas a most cost-effective and speedy alternative
to lengthy arbitration and litigation can be considered one of the more appropriate topics to whisper within the
construction industry. Similarly, Dr. Chandana Jayalaths article complements the sentiments expressed earlier
perfectly. Likewise, Sampath Marasingheges proposal is another effective tool to eliminate the fear of undue
encashment of performance securities.
While Prasanna Jayaweeracomprehensively discusses procurement routes and strategies in general, Asanka
Sanjaya Kumara focuses on the specific desire for lump sum building contracts among UAE clients. The articles
by Senarath Wetthasinghe, C. J. Quickson and Priyankara Premaratna display an excellent trend in career
progression, towards construction dispute resolution, with the first in particular being a comprehensive treatment
of the Prevention Principle. The article by Saman Welagedaraprovides a look at regular contract administration
practices.Vajira Kosala Hettiarachchis well-written article goes on to add further merits to the Samaratunga
Formula. Kidneswaran Kajananthas article has so cleverly documented Prof. Sams seminar that it evokes the feel
of the very auditorium in which the seminar used for the article was delivered.
On a cheerful note, you may once more see a new name, that of Mr. Sudeera A. Vidanage, amongst the members
of the editorial committee, whose thanks go to him for his commitment to delivering this excellent reference to
you.
To bring this editorial to its terminus, we ask all our readers to recall that this journal is your property. As such,
its performance is indeed your concern and all feedback and articles are not only appreciated, but an active part
of being a member of the SLQS and the construction community. We anticipate your academic pleasure and
hope that you assist us in ensuring it for future readers as well, by providing high-quality articles of your own in
the near future.
On behalf of the editorial committee,
Dhammika T. Gamage

June 2012

SLQS JOURNAL
Four Reasons for Adopting Adjudication
Process in UK Construction Industry
Murugesu Sathiyaseelan LLM (with Merit), FRICS, MCIArb

Executive Surveyor working with Gardiner & Theobald since August 2003, Counsellor and APC Panel
Chairman of RICS UAE

When a conflict arises between parties in construction


industry and if the parties cannot resolve such conflicts
by themselves, it will be handled entirely by others (by
a judge). This means the matter will be referred to courts
(litigation).
Adjudication is similar to litigation and has developed in
recent years in the UK as Construction adjudication or
adjudication. The Oxford English Dictionary defines the
word adjudicate as:
(Of a judge or court) decide upon (claim, etc) and sit in
judgment and pronounce sentence
Adjudication is a procedure that results in a decision that
binds the parties and will, in all usual circumstances, be
enforced by the court.
Many doubts were expressed while the Act was being
passed in the Parliament as to the appropriateness of
adjudication for the resolution of disputes and whether it
would have the desired effect. Enforcement was a matter
of great concern.
Concerns relating to the enforceability of the adjudicators
decisions were put to rest by the courts when Mr Justice
Dyson, as he then was, gave his judgment in the Macob
Civil Engineering Ltd v Morrison Construction 1999 case.

The case established inter alia the following issue:


Whether adjudication is in reality a speedy and


convenient dispute resolution process, and whether in the
practice of the UK construction industry adjudication
has become, as Mr Justice Dyson considered it to be in
1999, more than merely an intervening provisional
stage in the dispute resolution process

which has to be critically analysed considering the above


issue about the adjudication principles.
It is, therefore, appropriate to consider the following
major issues of the case:
1. Is it a speedy process?
2. Is it an intervening provisional stage in the dispute
resolution process?
3. Why are principles of natural justice required in
adjudication?
4. Is adjudication convenient for dispute resolution?

Is it a speedy process?

In the 1990s, arbitration was seen as unduly slow and


expensive and incapable of providing an effective
remedy for contractors and subcontractors who were
unable to obtain payment for work carried out (John
Uff, Construction Law, 9th Edition, Sweet & Maxwell,
London, 2005, page 63).
Also, litigation is a very lengthy process. Before any one
starts litigation the parties were asked to look into any
other available alternative dispute resolutions available in
the contract to settle disputes.
Since Lord Woolf produced his report Access to Justice
in 1994, more and more interest has been shown in
keeping the cases out of court and resolving them by
more appropriate and less costly means. As in the case of
litigation in recent years construction adjudication was
developed to deal with construction industry disputes.
Adjudication was introduced as a statutory right
in construction contracts in the Housing Grants,
Construction and Regeneration Act 1996 (HGCRA
1996), which came into force in the UK construction
industry on May 1, 1998.

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Adjudication is a dispute resolution process employed in
the construction sector which as per 23(2) Pt 1 Scheme
(The Scheme for Construction Contracts Regulations
1998) and Section 108(3) of the Act (Housing Grants,
Construction and Regeneration Act 1996) states that:

The Contract shall provide that the decision is finally


determined by legal proceedings, by arbitration (if the
contract provides for arbitration or the parties otherwise
agree to arbitration) or by agreement.

The parties may agree to accept the decision of the


adjudicator as finally determining the dispute

The adjudicator must reach his decision as per s.108 and


as per regulation No. 19 of Pt1 Scheme (The Scheme for
Construction Contracts Regulations 1998) as described
below:


Regulation - 19 (1) (a) 28 days after the date of


referral notice
Regulation - 19 (1) (b) 42 days after the date of
the referral notice if the referring party consents
Regulation - 19 (1) (c) Any other period exceeding
28 days after the date of referral notice as the parties
may agree after the giving of notice

After the Act came into force many criticisms that as per
the statutory rights the adjudication has to be carried out
within a narrow time frame which could be unreasonably
tight so as to result in injustice. Parliament is aware of
this.
The Macob Civil Engineering Ltd v Morrison
Construction 1999 case which was the first enforcement
case to come before the court. In this case paragraph 14
[defines the above statement?] and also states that the time
frame for adjudicator is very tight (see s.108 of the Act).

Lord Abernethy in Ritchie Brothers Ltd v David Philip


Ltd 2005 stated that the Parliaments intention in
providing for the right to refer disputes to adjudication
was to introduce a speedy mechanism by which to settle
disputes in construction contracts on an interim basis.
The aim of the scheme was clearly to reach a decision
within a short time. The time limit act is mandatory.
The following are a few of the subsequent cases among many
that followed the judgment in the Ritchie Brothers case:

Epping Electrical Co Ltd v Briggs & Forrester Ltd


2007,
St Andrews Bay Development Ltd v HBG
Management Ltd 2003,
Barnes and Elliott Ltd v Taylor Woodrow Holdings
Ltd 2003,

Hence, it is opined that the adjudication process is a


speedy mechanism for settling disputes among other
dispute resolution processes and was one of the intentions
of Parliament in enacting the scheme as stated in the
Macob case.

Is it an intervening provisional stage in the


dispute resolution process?
The intention of the Parliament was to introduce a speedy
mechanism to settle disputes in the construction industry
on a provisional interim basis and the adjudicators
decision was to be enforced pending final determination
of disputes by arbitration, litigation or agreement of the
parties. Section 108 (3), 23 (2) Pt 1 Scheme as stated in
the Macob case paragraph 29 states:

29. What the defendant could not do was


to assert that the decision was a decision for the
purposes of being binding and enforceable pending
any revision by the arbitrator. In so holding, I
am doing no more than applying the doctrine of
approbation and reprobation. A person cannot
blow hot and cold: see Lissenden v CAV Bosch Ltd
(1940) AC 412, and Halsburys Laws (4th edn) vo.6
para 957 and 958. Once the defendant elected to
treat the decision as one capable of being referred
to arbitration, he was bound also to treat it as a
decision which was binding and enforceable unless
revised by the arbitrator.

The Adjudicators decision is of a temporarily binding


nature which is clearly set out in Regulation No. 23 (2) of
Pt 1 Scheme the decision shall be binding on the parties
and they must comply with it until such time as the
dispute is finally determined by litigation, arbitration (if
arbitration is provided for in the contract), or agreement
between the parties.
In Herschel Engineering Ltd v Breen Property Ltd
2000, the adjudicators decision was not final or binding
on the parties; unless the parties agreed otherwise, the
adjudicators decision could be superseded by that of
either an arbitrator or the court.

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Also, it is worth reproducing the passage (paragraph 8)
from another case of Costain Ltd v Strathalyde Builders
Ltd 2004 - Judical control of adjudicators decision:

8) the decision of an adjudicator is provisional


in nature and may be undone by subsequent
arbitration or court proceedings. It is the
essence of adjudication that the determination
should be capable of speedy enforcement
adjudication is conducted according to very short
time limits . Under the typical adjudication
provisions found in building contracts adjudication
is given specific powers to take the initiative in
deciding the parties dispute.
the procedure that is followed in practice is
accordingly relatively similar to that followed in
arbitration, although matters are conducted in a
more speedy and summary manner

It could be argued that this may be the reason for the


Parliament not to abolish other dispute resolution
processes like arbitration and litigation of construction
disputes as stated in the Macob case.
Therefore in view of above, that adjudication decisions
were simply an intervening provisional stage may have
been what Parliament anticipated and intended, as
suggested by Dyson J in the Macob Case.

Why are principles of natural justice required in


adjudication?
Further to the above two issues, -a speedy process and
an intervening provisional stage in the dispute resolution
process which is likely to result in injustice- it could be
argued that adjudication did not require a fair hearing by
complying with principles of natural justice (PNJ).
In Discain Project Services Limited v Opecprime
Development Limited 2001, it was deemed that the
adjudicator must comply with PNJ and that the courts
will supervise such compliance.
Mr. Justice Dyson observed in Macob Civil Engineering
Ltd v Morrison Construction 1999 that the procedure is
a matter of concern:

June 2012

Is adjudication convenient for dispute resolution?


The adjudication process is convenient to the parties in
many ways as discussed in detail below:
The decision of an adjudicator is binding only until
the dispute is finally resolved by other available means,
but it appears that well over 90% of decisions are either
accepted or result in settlement and in either event do not
lead on to further proceedings (John Uff, Construction
Law, 9th Edition, Sweet & Maxwell, London, 2005, page
63.)
It is noteworthy that in a recent case -Wimbledon
Construction Company Ltd v Derek Vargo 2005- the
Judge set out the following principles which should be
used in deciding that the adjudicators decision ought to
be enforced:
1. Adjudication is a quick and inexpensive method of
arriving at a temporary result,
2. Adjudicators decisions are intended to be enforced
summarily and the successful party should not be
kept out of his money,
3. The probable inability of the successful party to
repay the sum awarded may constitute special
circumstances rendering it appropriate to stay the
enforcement proceedings,
4. If there is no dispute that the successful party is
insolvent then the decision will not be enforced.
The judge decided to enforce the adjudicators decision
even though it is unlikely that the other party would
repay as per the adjudicators decision.
In view of above, these types of provision are not available
in other types of dispute resolution. The parties have
greater freedom to agree with or reject the decisions
unlike in litigation or arbitration. Also, it is a process
which could proceed while the litigation or arbitration
process is going on.
The adjudication process will help to proceed with
the project during the time of dispute and address any
cash flow difficulties experienced by contractors and
subcontractors (Latham, M., Constructing the Team:
Final Report of the Government/Industry Review of
Procurement and Contractual Arrangements in the UK
Construction Industry, HMSO, London, 1994, at p.91).

June 2012

SLQS JOURNAL
Conclusion

2) Adjudication should be conducted in a manner


which those familiar with the grinding details of the
traditional approach can follow.
3) Enforcing the adjudicators decision (intervening
provisional stage until the dispute is finally resolved)
pending the final determination - Pay now and
Argue Later.

The
Macob Civil Engineering Ltd v Morrison
Construction case asserted that the following intentions
of Parliament were achieved:

In the UK construction industry most of the standard


forms of contract have adopted the Adjudication process
by HGRCA (s.108) which is a more cost effective and
speeder alternative to arbitration and litigation and
convenient. In JCT 98 Clause 41 A; the resolution of
disputes arising under the contract resolved through
Adjudication, the decision of the adjudicator is binding
on the parties until the dispute of difference is referred to
arbitration (clause 41.A.7.1)

Then the arbitration or litigation can proceed once the


project is completed.
In view of above many of the recent cases which were
appealed to enforce the adjudicators decision was enforced
following the Macob Civil Engineering Ltd v Morrison
Construction 1999 BLR 93; 64 Con LR 1; (1999) CILL
1470, case (which was the first case enforced in 1999 by
Mr. Justice Dyson).

1) Speedy and convenient dispute resolution process


(apparently find it difficult to accept).

Hadley Design Associates Ltd v Westminster City Council


Queens Bench Division (Technology & Construction Court) 09 July 2003
Keywords: Construction contracts; implied terms; Notice; Termination; Unfair contract terms
Summary: H, a firm of architects and surveyors, brought an action against a local authority for
wrongful termination of a contract.
Abstract: Architects argued thatlocal authority had given them a assurance that their contract will be
terminated only on default or the local authority ran out of money. Based on tis perception Architects
were induced to enter into a contract showing the reprentation of the same. However, despite this
assurance contract contained certain implied terms regarding termination. Case also focused to the
applicability of Unfair Contract Terms Act 1977.
Judege: Judge Richard Seymour Q.C
Held: There was no evidence of a collateral agreement limiting the reasons for termination, no
evidence that the local authority had made assurances in respect of termination, the contract did
not contain implied terms for conditional termination and local authority had not violated Unfair
Contract Terms Act 1977. Therefore, the local authority had been entitled to terminate the contract by
giving the notice which it had without needing any reason for doing so.

June 2012

SLQS JOURNAL
Demystifying a Mechanism to Deal with
Open Market Vacillations
Dr. Chandana Jayalath

D.Sc, M.Sc, B.Sc (QS) Hons, PG Dip (Cons Mgt), PG Dip (Intl Mediation), FRICS,
FIQS (SL), MCIArb
Consulting Engineering Group, Doha, State of Qatar
jayalathchandana@gmail.com

Whenever the majority of contractors are locked into


lump sum fixed-priced contracts, open market vacillations
are a risk to them, particularly in contracts of long
duration. This is not only unfair by the contractor but
also unhealthy for the industry in the long run. A surge in
material costs may considerably affect their bottom lines
where profit margins are not as high as they once were.
As a result, contractors have been searching for recovery
means through claims on their own basis whenever a
mechanism to deal with price escalation is absent in the
contract. Many contractors use the consumer price index
(CPI) as the basis of their claims although the purpose of
the index is something else.
Indeed, it may be cheaper in long run for the employer to
pay for what did happen rather than what the contractor
thought might happen in those areas of doubt which the
contractor cannot influence. In line with this principle
of construction economics, a method to deal with price
escalation allows the tenderers to overcome the risk of
providing an additional mark-up for unforeseen price
variations. The benefit of the doubt would then be passed
on to the employer in a deflation since any contract price
adjustment is applicable both ways. Since the aim behind
any mechanism should be to reasonably reimburse the
contractor for those eventualities he could not reasonably
foresee in advance, it must eventually reflect an equitable
risk sharing between the employer and the contractor.
Similarly, many standard forms of contract provide a
mechanism for contract price adjustment due to open
market escalation in specified construction inputs such
as major building materials, hire charges of plants, and
wages for labour. The choice of these inputs largely
depends on the cost significance in the overall share for
the quoted tender price. Therefore, the adjustments to
the contract price shall be made in respect of not only

a rise but also a fall in the cost of materials and other


inputs affecting the cost of the execution of the works.
Together with the traditional methods of calculating this
escalated component using contemporary records, there
are formula methods such as NEDO, Osborne, Baxter,
Haylett, and ICTAD, to name a few. In all cases, the
fluctuated component is ascertained on the difference
between the indices of costs of construction labour and
materials at the time of tendering and the current values
of those indices at the time of escalation in accordance
with a predetermined relative proportion for each cost
index.
Although a formula method is fairly straightforward
and simple to administer, it is difficult to introduce in
countries where there is no promotional entity to publish
construction indices acceptable as a single source authentic
cost database for budgeting, estimating, bidding and cost
validation. Since accurate input proportions and reliable
cost indices are integral elements in such a mechanism,
a traditional approach in an easy-to-understand manner,
(by removing complications) helps in the pursuit of a
reasonably compensable amount. As such, the first task
must be to lay down a couple of parameters, as follows:
1. For example, the projects the duration of which
exceeds one (1) calendar year may only be considered
for reimbursement of any price escalation on the
assumption that the contractors are in a safer, if not
better, position to foresee the likely price escalation
at the time of bidding for shorter durations. This
can be changed to six months, if necessary and
the projects eligible for price escalation defined
accordingly.
2. The contract price adjustment will be made only
on the selected items in the Bill of Quantities.
Many admin issues such as site delivery, calculating

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3.

4.

5.

6.

10

wastage, materials excess, and double or multiple


handling (on and off site) do not arise whenever
the adjustment is made in relation to the physical
quantity of permanent work at site in which the
fluctuated materials have been consumed. In
case the escalation is ascertained on the material
purchase, then it may be a case where payment
may be made even before they are consumed in the
works.
Once the escalation mechanism is connected with
the physical quantity of work done instead of
materials purchased, it avoids a glaring anomaly
where the payment on escalation caused by the
increase in prices of certain materials may be made
at a time when such materials were not used at all.
Also, it avoids over compensation on over purchased
materials, materials wastage in transit, usage and in
application, and redundant materials at the practical
completion.
A couple of specified materials of a selected set
of work items can only be considered for price
adjustment on the basis of cost significance. As per
the Pareto principle, it is usually 20% of the bill
items that represent 80% of the cost on the total
project which is true of building projects and not far
wrong of civil projects.
The adjustments to the contract price can only be
considered in respect of price fluctuations varied
by more or less than for instance 10% of the prices
which prevailed fourteen days prior to the scheduled
date of submission of tenders compared with the
prevailing prices at the time of procurement (in
accordance with the materials procurement plan
as approved by the engineer from time to time). In
a price drop the employer will gain the benefit of
price reduction once the cut off limit is exceeded.
However, if the current price is within a margin
of 10% above or below the basic price, then the
basic price shall remain unaltered, meaning there
will be no claim on price escalation. However, the
contractor has to use due diligence in procuring
materials in required quantities at the right time and
deliver the materials without causing unreasonable
wastage, since the burden of any occasional slip may
definitely fall on him.
Only the net difference in prices shall be considered
in the adjustment exclusive of profit and overheads of
the contractor. The whole idea is to prevent profiting
out of economic losses but bring the losing party

June 2012

back to the original position financially had there


been no fluctuation. Accordingly, the adjustment
to the contract price shall be calculated by applying
the net difference in prices to the quantity of work
done during the period where fluctuated materials
were consumed under respective specified items of
permanent works.
7. The adjustment shall only apply up to the estimated
quantities in respect of lump sum contracts (except
where the quantity changes have been considered a
variation eligible for contract price adjustment) and
actual quantities in respect of traditional re-measure
contracts.
8. It can also be reasonably assumed that the rates for
varied works are already inclusive of any escalation
except those priced with existing bill rates.
9. The materials incorporated into permanent works
shall only be considered for cost reimbursement
partly because temporary works can be of multiple
uses in other projects. Therefore, any temporary
works, plant and equipment, tools and consumables,
as well as small items are not matters for concern.
10. Omitted works and employer- supplied materials
can also be ignored in the adjustment of contract
price.
In administering, a detailed tender price break-up plays
an important role in deciding on the price quoted for
materials, showing separately the other cost elements
such as labour, plant, tools, wastage, site and head
office overheads, and profit, as well as trade discounts
on bulk purchases. Hence, the purchase price at actual
procurement will establish the current rate excluding the
cost of delivery to site.
However, there are mechanisms that mandate the
contractors to follow employer- supplied fixed rates for
selected materials with a list of accredited suppliers. One
would argue that accreditation helps in reaching the
economic order quantity (EOQ). EOQ is essentially an
accounting formula that determines the point at which
the combination of order costs and inventory carrying
costs are the least. The result is the most cost effective
quantity to order. However, the EOQ model is based
on the assumptions that the demand rate is constant,
recurrent and known (assumed to continue the same level
of demand for an indefinite future time with no random
variance); the lead time is constant and known (lead
time from order placement to order delivery is always

SLQS JOURNAL
a fixed number); no stock outs occur and materials are
ordered and produced in a lot [of batch?] and the lot is
placed into the inventory all at one time. The unit cost is
constant and no discounts are given for bulk purchases.
The purchasing cost per unit is unaffected by the quantity
ordered and the carrying cost depends linearly on the
average inventory level. This approach to determine
EOQ which involves optimizing costs of holding stock
against costs of ordering stock has been subject to much
controversy. In addition to concerns about the validity
of some assumptions, more recently, criticisms emerged
of the underlying rationale of the approach itself. In
order to keep the EOQ model relatively straightforward,
it is necessary to make assumptions related to stability
of demand, existence of fixed identifiable ordering cost,
and the cost of stockholding and so on. While none of
these assumptions is often strictly true, at times these
assumptions do pose severe constraints to the model.
Although the most fundamental criticism of the EOQ
approach comes from Japanese inspired JIT philosophies,
it would be too difficult a task for construction commercial
managers to find out representative costs of ordering and
stockholding in the light of these cost variables.
Where the forces of supply and demand tolerate the
price equilibrium, obligating the contractor to procure
materials from sources designated by the employer is
not only a gross intervention into contractors internal
transactions which are commercial by nature but also an
intervention in the supply chain. The theory of supply
and demand as an organizing principle for explaining how
prices coordinate the amounts produced and consumed
applies to price and output determination in the market
on the condition that no buyers or sellers are large enough
to have price-setting power. Market equilibrium occurs
where quantity supplied equals quantity demanded at a
price below equilibrium, and when there is a shortage of
quantity supplied compared to quantity demanded, it
poses a price hike-up in the accredited sources more than
in the open market. According to Milton Friedman and
many other monetarists, market economies are inherently
stable if left to themselves. Friedman effectively claims
that the social responsibility of business should be to use
its resources and engage in activities designed to increase
its profits (through) open and free competition without
deception. In Adam Smiths view, the ideal economy
is a self-functioning market system that automatically
satisfies the economic needs of the populace. Smith
describes the market mechanism as an invisible hand

June 2012

that leads all individuals, in pursuit of their own selfinterest, to produce the greatest benefit for society as
a whole. Demand-and-supply analysis can be used to
explain the behaviour of any type of market including
construction which is oligopolistic in nature for many cost
significant items. An intervention in the supply chain by
a major construction client (contributing a considerable
proportion of the gross domestic product (GDP) through
accreditation) is therefore a serious concern. In a nutshell,
large scale procurement through accredited sources can
be detrimental in the long run.
Another pitfall in such a mechanism is that the BOQ
items with materials supplied by accredited suppliers shall
be priced in two different places in the tender document:
supply cost to be priced under a separate schedule and
all other cost elements under respective BOQ items. This
method of pricing Bill of Quantities not only changes
the standard way of pricing (inter alia based on pricing
preambles) but also makes the evaluation of variations
difficult. This is an unnecessary infiltration of the pricing
strategies the contractors may employ from project to
project on different bases. Duplication of the costing of
materials may occur since the cost of a particular material
can be included under several bill items, except in a very
few cases. Instructing the bidders to be careful about
duplication would not suffice. Restricting premature
ordering from compensation is another drawback, which
is again an intervention in the contractors procurement
policy, forgetting the principle of economies of scale
which any prudent contractor follows in materials
procurement. This restricts the benefits of premature
bulk purchases for many forthcoming projects and in
line with replenishment of stocks at site level so that the
accredited suppliers price may have gone up more than
other sources in the market.
Thus, in devising a defect free mechanism, care must
be taken not to disturb the freedom of business. For
instance, the contractor has the liberty to procure
materials from a source of his own choice while the
employer also reserves the right to specify the source
of procurement in some instances. It is the duty of the
contractor, not the employer, to establish the basic prices
against the specified materials under specified bill items
forming part of the tender. Prices could be ex-factory,
imported or open market as the case may be, and it is
a pre-tender function of the consultant to specify the
materials, compute the input proportions and list them

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SLQS JOURNAL
in the tender document and verify the base prices with
a tender price break-up in support. Care must also be
taken in specifying materials eligible for compensation
since the use of materials may differ according to the
type of project. A reference list of construction material
would be in the case of residential building projects
of steel, cement, concrete, sand and stone whereas in
infrastructure projects it would be of concrete, timber
material, sand and stone, bridge columns, expansion
joints, asphalt products, drainage pipes, pre-fabricated
concrete components, etc. Therefore, price adjustment
clauses must be approached with care and should be
diligently drafted, specifically identifying the individual
building materials most at risk of price fluctuation. The
consultant should also check the authenticity of the
escalation information as a post-contract function. Also,
the consultant must keep records of variances in prices so
that a claim for contract price adjustment in a deflation
can be made on the employers behalf. Once the price
difference has been identified, it shall be a separate claim
in its own right.
Contract rates are not subject to change due to price
escalation, meaning that the rates shall not be revised
depending on the level of fluctuation. Also, a claim on
price escalation is separate from a claim for liquidated
damages by the employer since a delay in procurement
due to delay in progress has a knock-on effect that does
not prejudice the contractors eligibility for contract price
adjustment on open market price escalation. By the same
token, the contractor reserves the right to claim on price
escalation even during the extended period/s since he has
been permitted to complete the work on a new date.
Equally important is the notification procedure to hold
the contractor responsible for notifying the employer
of a price increase and its impact on the contract sum

and vice versa. The contractor shall upon the occurrence


of any event which may or may be likely to give rise to
adjustment of the contract price give notice to the engineer
and shall keep such invoices, accounts, documents or
records as are necessary to enable adjustment. Also, the
contractor shall keep the engineer informed in advance of
the procurement of such specified materials at the most
economical prices available at the time of purchase to be
made compatible with the procurement plan and actual
progress.
However, the importance of deciding on an optimum
contingency level can not be compromised on the
sophistication of the price escalation mechanism in place.
Usually being 10% of the total of quoted sums for billed
items, a contingency is an allocation for unforeseen
events during the currency of works. Price escalation is
one such phenomenon where the contingency allocation
is used without recalling additional funds. Therefore,
it is important to decide on the level of contingency
in a rational way as a pre-tender function of the
consultants. However, qualitative forecasting methods
utilize managerial judgment, experience, intuition, rules
of thumb and guesswork so that the decision model
is basically implicit and subjective. Trend projection
techniques may be appropriate in situations where the
consultant is able to infer, from the past behavior of a
variable, something about its future impact on inventory,
scheduling, seasonal variations and cyclical patterns.
Dr. Chandana Jayalath is a Chartered Quantity Surveyor,
working in the Middle East. His latest industrial experience
is in contract advice, claims review and dispute settlement
related to public infrastructure projects. He is the author of
Contractual Dimensions in Construction in addition to
more than 150 articles published online.

Viking Grain Storage v T H White Installation (1980)


The contract concerned the supply of grain silos. The grain developed mould whilst stored, due to
inadequate ventilation.
Held that the defendants were liable for not provideding goods fit for their purpose.

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SLQS JOURNAL
Performance security and possible
alternative mechanism for performance
security in the economic downturn
Sampath Marasinghege, B. Sc Hons (QS)

Is a Quantity Surveyor graduated from University of Moratuwa, Sri Lanka in 2002. He is currently working
for Damac Properties LLC as a Quantity Surveyor.

Introduction

What is performance security?

It is common in most present day construction contracts


that the contractor is required to provide a performance
security in the form of a bank guarantee to the employer
upon issue of letter of award as a means of guaranteeing
the contractors ability to perform its obligations and the
contractors financial viability under the construction
contract.

As stated above, performance securities are provided


as a useful means of creating financial security for the
employer against the contractors failure to perform his
contractual obligations. Generally, a performance security
is an arrangement under which the performance of one
party by another party is assured by a third party.

However, due to the impact of the current economic


slump, triggered by the financial crisis, which has
severely affected the construction industry in the United
Arab Emirates (UAE), some small scale (mostly sub
contractors) and medium scale contractors are unable
to provide performance securities as stipulated in the
contract. The main reason for this is that some financial
institutes in the UAE, mainly banks, do not provide
performance securities during the economic downturn
owing to uncertainty building up in the construction
industry over the last few years. As a result, employers and
contractors have sought possible alternative mechanisms
for performance securities in order to overcome such
situations and conduct the contract smoothly.
This paper discusses the possible alternative mechanism
for performance securities which can be adopted when
contractors are unable to provide performance securities
and its advantages as well as disadvantages. However,
it has to be noted that the contractor shall obtain and
provide a performance security (if required) under FIDIC
conditions of contract 1987, 4th edition.

Performance securities are traditionally categorized


as being of two types. The first is what is known as a
conditional performance security whereby the guarantor
(usually a bank) is only liable to make payment under
the security upon proof of the conditions stated in the
security. The principal characteristics of conditional
performance security are:
1. It is a contract of guarantee whereby the guarantor,
i.e., the bank accepts joint and several responsibility
for the performance of the contractors obligations
under the contract; and
2. The guarantor only becomes liable upon the
operation of the proof of a default/breach of the
terms of the contract, and the employer (beneficiary)
sustaining loss as a result of such default/breach.
The second characteristic is known as an unconditional or
on demand performance security where the guarantor is
liable to make payment merely upon receipt of a demand
for payment from the employer without proof of breach
or default by the contractor. These securities exhibit the
following characteristics:

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SLQS JOURNAL
1. It is a pledge by the guarantor, i.e., the bank, to
indemnify the employer merely when demand is
made upon him by the latter, and
2. It entitles the employer to call upon the guarantor
for payment whether or not there has been default
under the contract provided only that the call is not
fraudulent.
The duration and amount of a guarantee depends upon
the terms on which it is given in the contract. Generally,
in a FIDIC form of contracts, a performance security
remains in force until the contractor has completed the
works and remedied any defects.

to the percentage stated in the contract for performance


security can be held from each monthly statement as
an alternative mechanism for performance security.
However, it is obvious that the maximum limit of
additional retention should be equivalent to the amount
of performance security stated in the contract.
The major disadvantage of this mechanism can be
summarized as follows:

Furthermore, a performance security is not an insurance


policy which normally is a contract of indemnity under
which the insured is indemnified in the event of loss,
subject to the adequacy of the sum insured. There are
also three parties under a performance security (i.e., the
contractor, the employer and the guarantor, namely, the
bank) as opposed to two under an insurance policy (i.e.,
the insurer and the insured). Once a performance security
is issued, it cannot be cancelled until the stated discharge
date or until the subject matter of the indemnity has been
completed satisfactorily, whereas an insurance policy can
be cancelled before its expiry date with the employer
issuing a letter to the bank confirming his consent.

1. Performance security retention money is


accumulated based on the actual work done and the
total amount equivalent to performance security can
therefore be retained only after certification of work;
2. Unlike the performance security, there is no financial
guarantee from the commencement of the project;
3. It is not possible to retain the total amount equivalent
to performance security in the event major work is
omitted from the contract;
4. In the event the contractor is unable to perform his
contractual obligations during the contract period,
the employer does not have an opportunity to make
full payment as performance security and the total
amount will be limited to the amount of additional
retention money; and
5. Holding up the additional retention from
contractors monthly statements means that it
directly affects their monthly cash flows.

Possible alternative mechanism for performance


security

There are some advantages of this mechanism that can be


identified as follows:

FIDIC forms of contract encourage the contractors to


provide performance security in the form agreed by the
employer. However, due to the uncertainty building up
in the construction industry in the UAE some employers
and contractors agree on the need for some alternative
mechanism for performance security as guarantors, and
that banks or financial institutions do not provide such a
performance security.

1. It is not required to pay additional bank charges


to obtain and extend (if required) the performance
security; and
2. There is an opportunity to invest this additional
retention for any other investment from the
employer/developers perspective.

The following mechanisms are identified as alternatives


for performance security currently used in the UAE
construction industry:

Accepting a security cheque from the contractor as a


performance security is another alternative mechanism
currently practiced in the construction industry in UAE.
Most main contractors currently obtain security cheques
from their subcontractors as a performance security
because small scale contractors are unable to obtain
traditional performance securities from the financial
institutes (i.e., banks) because of their financial position.

Additional Retention for Performance Security


Apart from the general retention stipulated in the
contract, additional retention money which is equivalent

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Not only main contractors but also most employers
now accept security cheques from their contractors as a
performance security owing to the economic downturn.
The amount of the security cheque is equivalent to the
amount of performance security stated in the contract.
Security cheques can be provided as an undated cheque
or a dated cheque. However, it has to be noted that the
security cheque provided for performance security is a
dated cheque. There is a validity period for dated cheques
set by the Central Bank of UAE (as per current rules, it is
six months from the date of issue) and the dated cheque
needs to be re-issued by the contractor prior to its expiry.
The following advantages can be identified in this
alternative mechanism for performance security:
1. As stated in the aforementioned alternative
mechanism, there are no additional bank charges to
obtain security cheques; and
2. Since the amount of security cheque is equivalent
to the amount of performance security from the
commencement of the project, the employer has an
opportunity to make full payment at any stage of
the project.
However, there are several disadvantages in this alternative
mechanism that can be summarized as follows:
1. Generally, a performance security is an arrangement
under which the performance of one party for
another party is backed up by a third party. In
this alternative mechanism, however, there is no
financial guarantee provided by the third party to
the first party, i.e., the employer, but the second
party. i.e., the contractor provides the guarantee by
himself. There is a financial risk to the employer by
a dishonoured cheques though contractors provide
security cheques;
2. If the security cheque is a dated cheque, it is required
to validate the cheque before its expiry;

3.

There is a possibility that the contractor may decline


to provide dated cheques prior to their expiry at any
stage of the project; and
4. Cheques need to comply with the rules and
regulations issued by the Central Bank of UAE.
Normally, these rules and regulations can be
amended by the Central Bank from time to time
and employers therefore need to verify the validity
of security cheques provided by the contractors.

Conclusion

Due to the global economic downturn impacting the


construction industry in the UAE, financial institutes
(i.e., banks) decline to provide performance securities for
some contractors and therefore employers and contractors
have sought some alternative mechanism for performance
security.
Employers and contractors in the UAE construction
industry are testing some alternative mechanisms as
discussed above over the last few years. There are several
advantages and disadvantages in each mechanism. There is
a financial risk to the employer in accepting any alternative
mechanism rather than obtaining a performance security
in the form of a bank guarantee. Therefore, it is necessary
to identify the most suitable alternative mechanism to the
contract in the event a traditional performance security
cannot be obtained.
As stated above, FIDIC based contracts do not
encourage the parties entering into the contract to
accept any alternative mechanism for performance
security. However, when both parties need to accept
any alternative mechanism for performance security,
necessary contractual amendments are required to be
carefully incorporated into the contract.

Gillies Ramsay Diamond v PJW Enterprices Ltd (2003)


A claim for professional negligence against Diamond, who had provided general consultancy services
in relation to a building project, was referred to adjudication.
It was found that these services included arranging construction operations for others and/or contract
administration and therefore the matter could referred to adjudication, despite the absence of an
adjudication clause in the contract.

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Why most UAE clients go for Lump Sum
building contracts
S.M. Asanka Sanjaya Kumara
BSc (Hons), NCT(QS)

Asanka is a Quantity Surveyor graduated from The University of Reading, UK in year 2011. He completed
his National Certificate of Technology course in Quantity Surveying at Technical College, Sri Lanka in year
2005. Asanka has worked as a Quantity Surveyor in Sri Lanka, UAE & Morocco during the last decade. He
is currently working for Depa Interiors, Dubai, as a Senior Quantity Surveyor.

The United Arab Emirates (UAE) is a constitutional


federation of seven emirates (States), which was formally
established on December 2, 1971 and one of the most
prosperous and politically stable countries in the MiddleEast region. The petroleum industry plays an important
role in the UAE economy, and a construction boom
started during the first decade of the 21st century. It
[gifted] a number of large scale construction projects such
as shopping malls, manmade islands, new airports, roads,
a sophisticated railway transport service, hotels, office
buildings, and thousands of residential units including
luxury apartments and villas.
Most of the building projects and civil engineering
projects started in early 2000 and many of them have
been delivered within the first decade. The UAE was a
haven for construction people until the industry was hit
by the economic crisis that affected most of the countries
in the world during the last two years of the decade.
Almost all construction methodologies available in the
world were practised during the peak time and some of
them were successful while others were not. However, it
has been noticed that while most of the building projects
in the UAE were constructed under lump sum contracts
the civil engineering projects were constructed under remeasurement contracts.
It is emphasized, like in other countries in the world, that
the UAE construction industry has faced a greater risk
of Time, Cost and Quality of construction projects.
During the peak time in the industry, there were many
cases reported of the developer/client having sold the
building properties even without approved drawings
from the local authorities.
Apparently, most of the clients wanted to proceed with

16

lump sum contracts in the traditional procurement path


which was more popular during those days in the market.
Theoretically, design should be finalized to get the
maximum benefit from a lump sum contract; otherwise, a
re-measurement contract is the most appropriate option.
The contractor will have had time to assess the
buildability of the project, to organize his supply chain
and sub-contractors and generally to have satisfied
himself that the job can be completed at a profit, for
the contract price and within the contract period. In
the UAE, of course, precisely the opposite is usually the
case. First, the price and programme are fixed against an
outline design, and then a contract of some kind, often
just a letter of agreement, is signed. Only after that is the
design developed to a level of detail which enables the
contractor to see exactly what he has committed himself
to. The result, not surprisingly, is a book of variations
which quickly runs out of control and a completion date
without basis in reality.
The essence of a lump sum contract is that, in return
for an agreed firm price, the contractor provides all that
is necessary to ensure that the finished plan complies
with the contract document and specification, achieves
the required levels of performance and is completed
on time. The specification, performance requirements
and guarantees, and all other technical and commercial
contractual conditions must be agreed on in detail before
the contract is awarded. Once the contract becomes
effective, the lump sum price is payable regardless of the
actual cost incurred by the contractor. The contractor
must, therefore, include contingencies in his price for
estimating errors, uncertainties such as cost escalation
and currency fluctuations, the cost of which, on the basis
of his experience, will inevitably be incurred from time
to time. Such costs arise from design, procurement of

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SLQS JOURNAL
construction errors, and other unforeseen costs that that
the contractor might incur, but has no protection against
under the terms of the contract. When considering those
contingencies, the eventual cost may turn out to be
significantly different from his estimates originally made
for the work. The contractor takes the risk that overexpenditure will result in a smaller profit than expected
or even a loss, in the knowledge that, if all goes well, his
profit may be greater than expected.
Lump sum contracts can be divided into two major parts;
i. Lump sum contracts with quantities are based on
drawings and firm Bills of Quantities (BOQ), and
ii. Lump sum contracts without quantities are usually
based on drawings and specifications together with
schedule of work.

Common advantages of lump sum contracts





Competitive fairness - all tenders are based on exactly


the same information, and there is no interpretation
of information.
Cost certainty - the total cost is known at the outset
of the contract.
Programme certainty - the time-frame is established
at the outset of the contract.
Well established - this has been the most commonly
used route, and everybody knows its pros and cons.

Minor changes and adaptations for a specific project


are easy to implement with an established method of
valuation.
The method is capable of conversion to a guaranteed
maximum price (GMP).

Common disadvantages of lump sum contracts



Changes are difficult and costly.


Need to have substantially completed design prior
to bidding.
Contractor inclined to choose lowest methods /
materials to comply with specifications.
Bidding/Estimation process is expensive and
lengthy.
Contractors may include high contingency for the
rates due to the risk.
Limited contractors are sufficiently experienced
to capture the complete scenario of the contract
in order to submit a competitive price without
compromising the sustainability of the project and
contractors organization.

As a result of a recent survey conducted among 111 UAE


construction professionals to find out the reason/reasons
for selecting lump sum contracts in the UAE building
industry, the following were identified:

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SLQS JOURNAL
Participants were informed to disregard variation
situations during the survey (assumed there are no
variations). According to the above Figure 1, 93% of
respondents believe cost certainty to be the main reason
for the selection of lump sum contracts if there are no
variations.
The next two highest percentages of 85% & 83%
respectively were received for easy post-contract
management (assumed there are no variations) and easy
to forecast client cash flow.
Less post contract paper work also a major reason for
selecting lump sum contracts if there are no variations.
62% of participants state limited overall project duration
and 60% say to achieve faster construction and limited
post-contract duration as the other factors.
As per Figure 1, 65% and 62% of participants believe that
lump sum contracts will cause post-contract disputes and
it is difficult to manage variations. Therefore, handling
of post-contract variations has been identified as a key
problem of lump sum contracts.

56% of participants think that the clients choose lump sum


contracts because of the consultants recommendation.
According to the above table, lump sum contracts are less
riskier to the client than re-measurement contracts.
Cost certainty can be expected from a lump sum contract
if the design is finalized. All the types of evidence and
comments made throughout the survey clearly shows
that the UAE clients have chosen lump sum contracts for
building projects as a tool for transferring financial risk to
the contractor. It is obvious that clients should have cost
certainty in price and sell their property in advance as a
method of low risk and low cost fund raising.
The clients in the UAE wanted to achieve cost certainty
of their projects by using lump sum contract during the
last decade, but could not achieve it due to variations that
occurred because of improper tender documentation,
such as incomplete design and specification. This led
to lots of disputes in the industry and many cases have
ended up with unexpected cost overruns.

Risk allocation between the client & the contractor in different procurement routes (Figure 2)
(Takashi Saito,1999)

References
1.
2.

18

Skaik, Samer. 2008. UAE: Time for GMP contracting?. http://www.cmguide.org/archives/236


Saito,Takashi.1999.The characteristics of Japanese construction procurement by the risk management approach. London: Cobra 1999-RICS
Research.

June 2012

SLQS JOURNAL

Letter of Intent (LoI) and its importance in


the construction industry
C. J. Quickson
BSc (Hons), LLM (Constr. Law & Arb) , AAIQS, MRICS, CCE, MCIArb

1.1. Introduction to Letter of intent and its legal


aspect
It is a fact of modern building contracting that a
significant number of both main and sub contracts are let
under a letter of intent; the intention being to conclude
a written contract shortly afterwards. Letters of intent
are not confined to the construction and engineering
industries. However, most of the reported and unreported
cases concern those industries and so for convenience the
terms Employer and Contractor are used below.
In the present context, the term Letter of Intent is used
to describe a letter from the Employer to the Contractor
which includes the following elements:
a. The Employer indicates an intention to enter into a
formal, written contract with the Contractor for the
Contractor to carry out the work described in the
letter of intent.
b. The Employer requests the Contractor to start work
at once or at any rate before the parties execute the
formal, written contract.
However, the expression is not a term of art. This was
held in the leading case of ERDC Group Limited v
Brunel University where HHJ Humphrey Lloyd QC
stated about the letter of intent as follows:

Letters of intent come in all sorts of forms. Some are


merely expressions of hope; others are firmer but make
it clear that no legal consequences ensue; others presage
a contract and may be tantamount to an agreement
subject to contract; others are contracts falling short
of the full-blown contract that is contemplated; others
are in reality that contract in all but name. There can
therefore be no prior assumptions, such as looking to see

if words such as letter of intent have or have not been


used. The phrase letter of intent is not a term of art. Its
meaning and effect depend on the circumstances of the
case.
Pending the execution of the formal, written contract, a
Letter of Intent containing the two elements identified
above will normally take effect in one of three ways as
described below under types of Letter of Intent in use
Types (a), (b) & (c).
For all practical purposes, where the Letter of Intent
results in a contract which incorporates the conditions
of the FIDIC, JCT or other standard form referred to in
the Letter of Intent, it will make little difference whether
the Letter of Intent is analysed as falling into type (b)
or type (c). What matters is whether the conditions are
incorporated or not under the above types.
Therefore, the types of Letter of Intent can be reclassified
as follows, which will help to discuss further in detail the
LoI under the following categories.
Type (a)
A pure letter of Intent: As a request by the Employer to
the Contractor which, if actioned by the Contractor,
entitles the Contractor to a restitutionary remedy, namely,
payment of a reasonable sum (a quantum meruit) for the
value of any work done or any materials supplied.

Type (b)
A letter of intent incorporating interim contractual
arrangements: As a request by the Employer to the
Contractor, which if actioned by the Contractor, creates
an interim contract between the parties on terms that fall
short of the terms and conditions of the relevant standard
form.

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Type (c)
A letter of interim sufficient to form a contract for the
entire project: As a request by the Employer to the
Contractor, which, if actioned by the Contractor, creates
an interim contract between the parties on most or all of
the terms and conditions of the relevant standard form
OR
As a final contract between the parties incorporating
the terms and conditions of the formal, written contract
notwithstanding the failure of the parties to execute the
formal, written contract.
Dividing the Letters of Intent into the above three
categories will depend on the intention of the parties,
which is found by an objective interpretation of:
a. The language of the Letter of Intent
b. The surrounding circumstances, including anything
the parties wrote, said or did subsequent to the
Letter of Intent.

1.2. Critical analyse of its impact on disputes


aroused from letters of intent
This section will provide, how the decisions made by
judges from the cases in the past years due to the disputes
arouse from the letters of intents, under the above 3 types,
as discussed in the previous section.
Through these discussions, it will be easy to get the
feedback and results of how the parties drafted the Letter
of Intent in the past years and how it had been interpreted
by the parties.
a. Cases classified under Type (a)
The court prefers to avoid putting a Letter of Intent
into this type at all. Where a letter of intent authorises
work, materials or services to be provided pending the
conclusion of some further agreement and the letter is
accepted, the court will try to establish a contract for that
which the letter requires since that would be consistent
1
2
3
4
5

20

with the parties presumed expectations. In the case of


Durabella Ltd v J Jarvis & Sons Ltd1 where Judge HHJ
Humphrey Lloyd QC held that It is in my judgment
clear that Jarvis intended that its formal order was being
postponed solely so that it could record the results of the
survey and measurement, i.e., the quantity to be paid for
at the agreed rate.
However, a contract cannot exist unless it is clear that,
viewed objectively, the parties were in fact agreed on all
the matters which they considered necessary and which
are necessary to form a contract.
Further in the case of Trentham (G Percy) Ltd v Archital
Luxfer Ltd2, where Steyn LJ said in an often quoted
dictum that the fact that a transaction is performed on
both sides will often make it unrealistic to argue that
there was no intention to enter into a contract. However,
Steyn LJ went on to state that the position might be
different where there was an express provision in a letter
that there was to be no contract at all until the occurrence
of a particular event, such as the execution of a formal
contract.
In the case of Jarvis Interiors Ltd v Galliard Homes3,
where Lindsay J (with Schiemann LJ and Evans LJ
agreed) noted the broad disposition to find a contract
if one can.
However, in some cases the terms of the Letter of Intent
and/or the facts may be inconsistent with an intention to
enter into any contract at all. Which of these types fall
under this category Type (a)? An example is British Steel
v Cleveland Bridge, 4where it was held that there was no
if contract when, in a case such as the present one, the
parties were still in the state of negotiation.
The case of Jarvis Interiors Ltd v Galliard Homes5 is a
more recent example. The Court of Appeal found that
in the absence of a contract under seal, there was no
contract at all. Note, however, that Galliard did not
advance the argument that the Letter of Intent, when
acted on, created a contract Evans LJ clearly thought
this argument would have succeeded.

Durabella Ltd v J Jarvis & Sons Ltd (2001)83 Con LR 145


Trentham (G Percy) Ltd v Archital Luxfer Ltd[1993] L Lloyds Rep 25at page 27
Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33 (CA)
British Steel v Cleveland Bridge 24 BLR 94
Jarvis Interiors Ltd v Galliard Homes [2000] BLR 33

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SLQS JOURNAL
As discussed above, where the cases fall into Type (a), the
effect of the Letter of Intent is to authorize the Contractor
to carry out the work. However, the Contractor will be
entitled to stop work at any time without notice.

simple contract between the parties created by the Letter


of Intent, which provided that such work as was carried
out in accordance with the specification and the drawings
would be remunerated on a quantum meruit basis.

Similarly, the Employer will be entitled to instruct the


Contractor to stop work at any time without notice.
Similarly, in the absence of a contract, the Employer will
not be able to counterclaim for breach of contract, e.g.,
for the cost of defective work. However, it seems that the
defects can be taken into account when assessing what
the work is worth as decided in the case of British Steel v
Cleveland Bridge6 24 BLR 94

Hall v Towse South Ltd v Ivory Gate Ltd10 and ERDC


Group Ltd v Brunel University (TCC), HHJ Humphrey
Lloyd QC, 29th March 2006 are further examples of
cases where the court found a bilateral contract whose
terms fell short of the intended bilateral contract.

b. Cases classified under Type (b)


Under this category, it was held by HHJ Thornton QC
in the case of Hall & Towse South Ltd v Ivory Gate Ltd7,
where he stated that by starting work Hall & Towse
accepted the offer contained in the Letter of Intent
resulting in a provisional contract. The contract was a
bilateral one that required Hall & Towse to complete the
works in a reasonable time for a reasonable sum. As far
as reasonably possible, valuations were to be carried out
in accordance with the JCT provisions referred to in the
Letter of Intent.
In Mowlem PLC (trading as Mowlem marine) v Stena
Line Ports Ltd8 it was common ground that each Letter
of Intent in a series created an interim contract which
superseded each earlier contract. Each Letter of Intent
imposed a cap on the amount which the Employer
would be liable to pay. The Employer argued that this
was simply an if contract with the result that the
Contractor was entitled to stop work at any time. The
issue was whether the Contractor was entitled to be paid
a reasonable sum in excess of the cap for work he carried
out which, he said, exceeded the value of the cap. HHJ
Richard Seymour QC held that all the work was subject
to the final interim contract and so the cap applied to it.
The initial contract in Westminster Building Co Ltd v
Beckingham9 was an if contract, where there was a
6
7
8
9
10
11
12

In the case of Hackwood Ltd v Areen Design Services


Ltd11, Field J held that when the Letter of Intent was
construed against the background of the surrounding
circumstances, it was the intention of the parties to enter
into an interim contract incorporating all the JCT terms
and conditions save to the extent that those terms were
inconsistent with the terms of the letter.
Cases classified under Type (c)
In this Category, the proper conclusion is that the
parties intended to contract on the full terms of the
intended contract referred to in the Letter of Intent
notwithstanding that they never in fact executed a formal
written contract. Depending on the facts, in particular
on the precise language of the Letter of Intent, this may
result either in a conclusion that the parties entered into
an Interim Contract pending execution of the formal
contract or that there was a Final Contract because
the parties expressly or impliedly dispensed with the
requirement for the execution of a formal contract.
In the case of Harvey Shopfitters Limited12 v ADI Limited
, the crucial phrase in the Letter of Intent was If, for any
unforeseen reason, the contract should fail to proceed and
be formalised, then any reasonable expenditure incurred
by you in connection with the above will be reimbursed
on a quantum meruit basis. Harvey argued that this
meant the parties intended the contract should be
formalised by formal contract documents being signed,
in the absence of which Harvey was entitled to a quantum
meruit. The Court of Appeal rejected this argument. The

British Steel v Cleveland Bridge 24 BLR 94


Hall & Towse South Ltd v Ivory Gate Ltd (1997) 62 Con LR 117
Mowlem PLC (trading as Mowlem marine) v Stena Line Ports Ltd [2004]EWHC 2206
Westminster Building Co Ltd v Beckingham [2004]EWHC 138 (TCC)
Hall v Towse South Ltd v Ivory Gate Ltd (1997) 62 Con LR 117
Hackwood Ltd v Areen Design Services Ltd [2005] EWHC 2322 (TCC)
Harvey Shopfitters Limited v ADI Limited 2003] EWCA Civ 1757

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Court of Appeal found that the words meant that the
only circumstance in which Harvey would be entitled to
a quantum meruit was if the contract did not proceed
and was not finalised. The contract did proceed and so
Harvey was not entitled to a quantum meruit.
Allen Wilson Shopfitters v Buckingham13 is another case
where HHJ Coulson QC concluded that the signing and
returning of the Letter of Intent by the contractor led to a
contract incorporating the JCT conditions referred to in
the Letter of Intent.
Summary
As discussed above under 3 Types, the more recent cases
show that the court is inclined to find a contract if it
can (at least in construction/engineering cases) since the
court believes this will usually accord with the intention
of the parties (Hall & Towse v Ivory Gate, Durabella v
Jarvis, Jarvis v Galliard).
However, when the Letter of Intent and the surrounding
circumstances show that the parties were continuing to
negotiate about matters that were or that they regarded
as essential to the existence of a contractual relationship
between them, there will be no contract (Durabella
v Jarvis; British Steel v Cleveland Bridge4). The same
will be true if the Letter of Intent expressly states that
there will be no contract between the parties until the
occurrence of a stated event and that event does not occur
or if the Letter of Intent contains some other express term
negativing the existence of a contract (dictum of Steyn LJ
in Trentham v Archital; Jarvis v Galliard).
As discussed above, we can come to a conclusion based on
the cases as follows, how the court / judge will interpret
and act based on the terms, wordings and intention of the
parties used in the Letter of Intent.
The court is well aware that in the construction industry
the parties all too often simply fail to get round to
executing a formal contract incorporating the terms of
a standard form the parties contemplated should govern
their relations.
As in Type (b), where the Letter of Intent indicates an
intention to enter into a contract on a standard form,
where the contractor starts work on the basis of the letter
13

22

and where all that is outstanding is the execution of the


written form, then the court is likely to conclude:
(i) The parties entered into a bilateral contract (final or
perhaps interim).
(ii) The contract incorporated the terms of the standard
form as discussed above under the case of Harvey
Shopfitters v ADI, Westminster Building v
Beckingham and Allen Wilson v Buckingham.
The following factors are, [without more,?] unlikely to
lead to the opposite conclusion:
(i) The absence of an executed contract (Hackwood v
Areen; Westminster Building v Beckingham; Harvey
Shopfitters v ADI; Allen Wilson v Buckingham).
(ii) The use of the future tense in the letter of intent
(Hackwood v Areen).
(iii) The fact that the parties continue to negotiate about
those terms of the final contract (Hackwood v
Areen) that the court regards as immaterial.
(iv) The absence of agreement on points the court
regards as immaterial.
Also, under Type (c) where the Letter of Intent indicates
an intention to enter into a contract on a standard form,
where the contractor starts work on the basis of the letter
and where the parties do not execute the written form,
one or more of the following factors may lead to the
conclusion that the parties entered into either an interim
bilateral contract, but one which did not incorporate the
terms of the relevant standard form, or a simple interim
unilateral contract:
a. An absence of agreement on all the matters which
the parties considered necessary and which were
necessary to form a final contract: Durabella v Jarvis.
Such a failure may result in the conclusion that there
wasnt a contract at all.
b. The fact that the parties continue actively to
negotiate about material matters such as the scope of
the work and materials to be supplied, the date for
completion, the price, etc. In some circumstances,
such negotiations may also indicate the absence of
any intention to contract at all, as in British Steel v
Cleveland Bridge.
c. The language in the Letter of Intent which is
inconsistent with the incorporation of the terms
of the standard form or which makes it clear that

Allen Wilson Shopfitters v Buckingham [2005] EWHC 1165 (TCC)

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SLQS JOURNAL
pending something further happening, there is a
simple unilateral right to be paid for work done.
For example, an express provision that pending the
execution of the formal contract, the Contractor is
to be paid a reasonable sum for the work executed
and the Employer is entitled to terminate the Work
at any stage. In some circumstances, however,
such a provision may prevent a contract arising.
Or language that makes it clear the Contractor is
instructed to commence only a limited amount of
work (Eugena v Gelande14 where the judge stated
that as far as the works not covered by the language
of Letter were concerned, Eugena was not entitled
to payment: there was no express or implied term in
the Letter providing for payment and there was no
express or implied request for Eugena to carry out
the work which would found a claim for a quantum
meruit)
Where the proper conclusion is that there is a bilateral
Interim Contract, but one which does not incorporate all
the terms of the standard form referred to in the Letter of
Intent, it seems the court is likely to be ready to conclude
that any relevant terms were incorporated subject to
evidence of a contrary intention, as discussed above in
the cases Hall & Towse v Ivory Gate; Hackwood v Areen.
Where the Letter of Intent results in an Interim Contract
or Contracts for only part of the Works:
(i) The Contractor will be entitled to the payment at
the agreed rates for that part of the Works.
(ii) Where the Contractor carries out additional work,
the question of what further payment, if any, he will
be entitled to will depend on the circumstances.
a. Where a Contractor carries out the additional work
14
15

at the Employers request, the normal inference


is that the parties intend the Employer shall pay
the Contractor a reasonable sum for it (Latchlin
v General Med15 Jacob LJ giving the judgment of
the Court said In the absence of any other facts,
the giving to, and carrying out of, instructions by
a professional normally gives rise to an implied
promise to pay because no other explanation
of those facts makes commercial sense necessity
compels the conclusion).
b. Where, however, the Letter of Intent places a cap
on the amount of the Employers liability, the
Contractor will not be entitled to further payment
above the cap, subject to the Employer being barred
from relying on the cap by waiver, estoppels, etc.
(Mowlem v Stena; Eugena v Gelande).
c. However, when the letter is properly construed it,
the cap may be ineffective (AC Controls v BBC
, where HHJ Thornton QC concluded that when
the detailed provisions of the Letter of Intent were
properly construed, the financial limit did not apply
and ACC was entitled to claim the full value of the
work it had carried out.
(iii) The other rights and obligations of the parties
will depend on the terms of the Interim Contract
(Eugena v Gelande).
As a conclusion and as per the critical evaluation with the
case laws under above 3 Types, it is vital that Type (c) [will
fulfil in both cases, Neither, the parties are forming the
formal contract nor the parties are not forming the formal
contract.?] Therefore, the LoI in Type (c) will diminish
and avoid the possibilities of disputes arising between the
parties, but it depends on the proper drafting of a LOI.
My next article as a continuation of this will focus on the
requirements of a LOI to form a binding agreement.

Eugena v Gelande [2004] EWHC 3273 (QB),


Latchin v (1) General Mediterranean Holdings SA (2) Mr. Auchi [2003] EWCA Civ 1786.

Sauter Automation Ltd v Goodman (Mechanical Services) Ltd (1840)


A sub-contractors quotation was expressed as subject to our standard terms and conditions which included
a retention of title clause. The main Contractor sent an order stating terms and conditions in accordance with
the main contract. The Sub-contractor, without further communication, delivered the goods.

Held that this amounted to an acceptance by them of the main Contractors counter offer.

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Internal Auditors are at Site!
Saman Jayasiri Sirisoma Welagedara
BSC (Hons) , MRICS
Internal Audit Manager
Dubai Properties Group
Dubai

After a comfortable period during a construction boom,


we are now in a recession. Everyone is pinching every
penny. Owners are looking for the reasons for mistakes
made in the past. Managements are keen to monitor
day-to-day activities of their employees closely. Thus, the
auditors are now at site!
The Quantity Surveyor is the most important member of
the construction project team, from the perspective of the
auditors. Why?
1. He has the most historical records.
2. He is responsible for the money spent on the project.
3. He is the commercial and contractual advisor to the
client.
4. He is the last member of the project team to leave.
Hence, the Quantity Surveyor has to be prepared to face
audit queries at regular intervals. How does he prepare to
face them?

What is an internal audit?

Internal auditing is an independent, objective assurance


and consulting activity designed to add value and improve
an organizations operations. It helps an organization
accomplish objectives by using a systematic, disciplined
approach to evaluate and improve the effectiveness of risk
management, control and governance processes.

What are internal auditors looking for?


Internal Controls
What do you know about internal controls which
are applicable to your scope of work? There are five
interrelated components in internal controls:
The organizations operating environment
Goals, objectives and related risk assessments

24

Controls and related policies and procedures


Information systems and communication methods
Activities to monitor performance

An effective control system provides reasonable, but


not absolute assurance for the safeguarding of assets,
the reliability of financial information, and compliance
with laws and regulations. Reasonable assurance is a
concept that acknowledges that control systems should
be developed and implemented to provide management
with the appropriate balance between the risks in a
certain business practice and the level of control required
to ensure business objectives are met. The cost of control
should not exceed the benefit to be derived from it. The
degree of control employed is a matter of good business
judgment.
In a project audit, what kind of controls would internal
auditors like to see?
1.
2.
3.
4.

Financial reconciliation
Shared savings calculations
Contingency, allowances, credits
Closeout reporting

Policies and Procedures

Internal auditors follow a guideline in connection with


the companys policies and procedures. If your office is
about to be audited, you should be able to understand
the procedures and processes established in the company.
Most leading companies have well documented
procedures and processes that are easily accessible to all
employees. You should be able to read and understand
the areas relevant to your scope. If anything is not clear,
it is managements responsibility to explain to you. So
please be clear.

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SLQS JOURNAL

certificate would come to your table after passing a


number of stations. In the same way it will go to
more tables to complete its process. Sometimes, you
are responsible for the overall time taken for the
process! So how do you track your documents? How
do you control meeting your deadlines? Be smart
and enter all critical documents, such as payment
certificates, variation orders, draft internal approvals,
etc. in a tracking system. Add a pop up mechanism
to remind you to follow up. Internal auditors are
concerned about delays!

Be aware, however, that if something is not in the


approved procedures or processes, it is the operation
teams responsibility to bring such activities to
managements attention to take the appropriate measures.
Otherwise, auditors will look for best practices, which
will be subjective and debatable. It shall be in your
individual interest to have a comprehensive procedure
in your duties. Internal auditors would like to see what
you have done to reach your conclusion where debatable
issues are involved. Take additional care in documenting
the process you have followed (whether approved or not).
Now, where are you? You do everything stated above in
your day-to-day duties. An internal auditor is looking for
whether you are well aware of internal controls and they
are adequately applied.

When is the Contractors All Risk insurance expiring?


Did you send a reminder to the contractor? Include
all insurance policies in the tracking system. Then
you are managing insurances, not merelykeeping
records!

How do you apply internal controls to your dayto-day business?

4. Keep records of communication

1. Risk assessment

You are dealing with various stakeholders of the


company and external customers. Every transaction
you make may be important to the company. Keep
records of communications, especially those related
to critical transactions. Letters, e-mails, reports,
presentations, memos, etc. are important to track
your dealings. They would also help you safeguard
yourself. Request others to confirm any verbal
communication by e-mail or letter whenever you
feel it important to do so. Never take action on
verbal communications unless confirmed in writing!

You may engage in negotiations to finalize a claim.


Make sure to document every negotiation step. You
will be the person who is responsible for drafting the
final agreement. Internal Audit would request you
to provide documented negotiation records. Attend
the commercial meetings regularly. It is one of your
basic responsibilities. Take notes in the meeting and
compare them with the minutes of meetings. Never
agree to something not discussed and agreed on!

Modern internal audits are mainly based on


risks. Your project will be audited based on a risk
assessment done by internal auditors. If your
department has a risk assessment process, internal
auditors will request a copy of the risk register
maintained by you. An updated risk register would
make things easy and it will be a good approach
towards a successful audit from your point of view.
Internal auditors consider management to be
nonexistent without risk management.

2. Be within your limits and check others also


Most companies have their approved Delegation of


Authority (DOA) in place. Keep a copy with you
at all times. When you draft an internal approval
request or a variation order, check the DOA. Make
sure that you are signing for something within
your limits. Check other signatures for the same.
If you find any exception, report to your manager
immediately. Violation of DOA will be a serious
concern to internal auditors because overriding ones
own procedures is the biggest violation in a business.

3. Keep tracking

All your activities are related to a process. A payment

5. Be wise in justifications

You are the commercial judge in a construction


project which is exposed to a huge number of
variations. Most of these variations would cause
additional costs to the client. Hence you should be
able to give proper justification for the variations.

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The common reason that It was not in the contract
may not be sufficient for internal auditors. They
may be interested in determining why it was not in
the contract. Be ready for such questions.

Your internal approval form should be able to


provide the story of the variation or claim. Internal
auditors like to read the history: How did this
happen? Who initiated it? How did you select the
best option? Did we get the best market price? Why
are there no cost savings? etc., etc. Internal auditors
would like to see the best practices in place in the
finalization of claims! Three quotations may not
be practical at all times, but try to be reasonable to
convince the auditors. Well-justified variations of
claims will not be questioned!

6. Do reconciliations regularly

What is the net position of the contractors accounts?


How much retention money has to be released?
How much do you have to recover from advance
payments? What are the back charges? Are you
confident about all adjustments? Discounts? When
did you update your records? Internal auditors are
looking for a clear picture of accounts. An updated
reconciliation would save time for auditors as well as
the auditee!

7. Be proactive in mitigation of losses


Mitigation actions to avoid or reduce losses are


expected from every employee of the company.
Whether it is within your scope or not, at least the
minimum possible effort needs to be expended in
the vicinity of a loss or damage to the company.
Internal auditors would like to write possible
minimum preventive or mitigation action taken
by the stakeholders. Also, in a contractors claim
finalization, this will be very important as his basic
obligation!

8. Be sure and comfortable about your documentation


26

You are handling thousands of documents and most


of them are critical to the project. You have to be
sure about the completeness of your documents.
Your filing system should be able to provide your

documents with good protection. Missing papers


in a document may lead to unwanted questions. A
good checklist for at least variation orders, payment
certificates and claim determination would help you
relax!
9. Do your own assessments

You can do your own evaluation of the duties. If you


made reasonable deadlines, no complaints from the
client, contractor or your supervisor would arise and
you are ok. Keep records of appreciations.

10. Be accountable and responsible


Always try to be responsible in your work. You


are accountable for all good or bad things in your
work. If you have taken over any work from another
person, try to obtain a comprehensive handing-over
note from him. Prepare your list of requirements and
send it to him before he prepares his handing-over
note! Pay attention to all risky areas like variations,
additional work, etc. Release him after you are
comfortable with the information and knowledge
transferred to you. If you are not happy with the
handing over and if there are significant issues which
may lead you into trouble in providing justifications
or reasons, keep your management updated with
appropriate records.

Finally, Internal Auditors are at site to protect you.


Human errors and mistakes are unavoidable in our dayto-day work. However, such human errors or mistakes
should not harm your professional career or personal life.
Auditors will look at your work from a different angle
and highlight the areas of concern before you are exposed
to an external party. It is your responsibility to make sure
that the project has reasonably delivered the best in the
industry. Internal auditors would help you in various
ways to improve your working environment.
Your work is very important to the company and
trusted, efficient employees are the most important asset
of a business. Do not forget that you are like contract
administrators in the riskiest business in the world.
Audited projects will receive great respect in all aspects
and at the end of the day you are safer than before. So,
be happy, the auditors are at site!

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The Steps an Arbitrator should take Before


and During a Full Oral Hearing
Priyankara Premarathna
HND QS, ACIArb

Acting Manager of Commercial and Procurement Department of Palm Utilities Dubai.

Introduction

This paper briefly describes the steps an arbitrator should


take before and during a full oral hearing to ensure that
the parties have a reasonable opportunity to present
their case when the arbitrator is properly appointed, the
submissions have been properly completed, and disclosure
and exchange of witnesses statements (including expert
evidence) have already taken place.
An arbitration tribunal is a panel of one or more
adjudicators, which is convened and sits to resolve a
dispute by way of arbitration. The tribunal may consist of
a sole arbitrator, or there may be two or more arbitrators,
which include a chairman. The parties to a dispute are
usually free to agree on the number and composition of
the arbitral tribunal. In some legal systems an arbitration
clause in the contract provides for two or any other
even number of arbitrators. The appointed arbitrators
will select an additional arbitrator as a chairman of the
tribunal to avoid a deadlock arising.
The parties are generally free to determine their own
procedure for appointing the arbitrator or arbitrators,
including the procedure for the selection of a chairman.
If the parties decline to specify the mode for selecting
the arbitrators, then the relevant legal system will usually
provide a default selection process.

Preliminary Meeting

Arbitrations usually have a preliminary meeting.


Following the exchange of preliminary claim statements,
general supporting documents, and in the case of quantum
disputes a final offer, the arbitrator will then contact
the parties and arrange a preliminary meeting. At the
preliminary meeting the arbitrator and parties will discuss
the procedure appropriate for a particular dispute. In the
absence of agreement between the parties on procedure,

the arbitrator has the discretion to impose procedures


consistent with the object of these rules to insure a fair,
expedient, and final resolution of the dispute with a
minimum of expense to the parties. It is an opportunity
for the tribunal to meet the representatives and establish
the procedures to be followed. It is important for the
decision makers of the disputing parties to be present at
the preliminary meeting, so that there is a minimum of
recesses/adjournments for obtaining instructions. The
primary objectives of a preliminary meeting are usually
as follows:
a. To determine the issues in the dispute.
b. To determine the matters, if any, on which they are
in agreement.
c. To determine what documents, correspondence,
books, or records shall be produced, when and by
whom, and whether experts are to be called.
d. To determine the law which will govern the
procedures and the substance of the arbitration,
unless such law has already been specified in the
arbitration agreement.
e. To consider whether on site inspections shall be
part of the proceedings.
f. To decide upon the powers of the arbitrator with
respect to remedies, including interim relief and
conservatory measures.
g. To indicate the number of witnesses likely to be
produced.
h. To estimate the length of time the hearing might
take.
i. To determine whether a stenographic record or
other type of recording of the proceedings should be
kept or if any particular services, such as interpreters,
translations or security measures should be provided.
j. To determine the manner in which the arbitrators
fee and the expenses of the arbitration will be

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SLQS JOURNAL
calculated, secured, and paid, including any deposits
to be advanced unless such arrangements have not
been stated in the Contract or the Arbitration
Agreement..
k. To fix the date, time and place of the hearing.
l. To make such other determinations as may be
necessary before the hearing.
m. To decide which of the points referred to in (a) to (l)
above are to be covered by an engagement agreement
and to complete and sign such agreement either at
the meeting or prior to the formal hearing.
n. At the preliminary meeting, the arbitrator shall
disclose any personal interest in the matters in
dispute and any previous relationship with any of
the parties to determine if there is any objection to
his/her continuing to act.
A preliminary meeting is very important due the fact
that arbitration shall be conducted in accordance with
any decisions reached at the preliminary meeting. The
parties will [come to the agreement, committed herein
would be monitored and measured throughout until the
award has been made, enforced, and implemented.?] This
meeting sets the basis for proceeding with the arbitration
in accordance with the applicable law.

Pre-Hearing Meeting/Conference

The purpose of the pre-hearing meeting is to provide


the parties with basic information about the pre-hearing
process and its requirements, and allow the parties a
reasonable opportunity to comment on items listed in the
agenda. The main hearing will be shortened or simplified
as a result of parties being better prepared and having
relevant information disclosed beforehand to each other.
The pre-hearing conference can also result in a more
focused tribunal hearing.
The Chairman will issue a procedural order following
the conference that contains his ruling on disputed or
otherwise unresolved issues.
The tribunal may direct the parties to participate in prehearing conferences to consider:
a. The settlement of any or all of the issues;
b. The identification and simplification of the issues;
c. Facts and evidence that may be agreed upon;
d. The dates by which any steps in the proceeding are
to be taken;

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June 2012

e. The estimated duration of and dates for the hearing;


f. To arrange the bundles of documents;
g. To review the requirement of postponement of the
hearing date;
h. To ensure that the parties require additional time to
present their case;
i. Any other matters that may assist in the just and
most expeditious disposition of the proceeding,
including
i) Place for hearing
ii) Exchanging documents among the parties.
iii)
Identifying and resolving preliminary
objections or procedural issues including
particulars, disclosure or production of
documents,
interrogatories,
witnesses
statements, expert witnesses, expert reports
and exchanges of submissions;
iv) Deciding procedural issues including the dates
by which any steps in the proceeding are to be
taken or begun.
v) Considering applications for party status;
vi) Determining whether a settlement conference
is appropriate in the circumstances; and
vii) Determining the form of the Notice of
Hearing, who should give it and bear its costs
for it, and to whom and in what manner the
notice should be given.
The Notice of the Pre-hearing Conference may require
parties by specified dates to exchange or file documents,
pre-hearing submissions or provide such other
information as the tribunal deems appropriate, and such
notice shall include:
a. The date, time, place, format and purpose of the
pre-hearing conference;
b. Notice that each party or person who has applied for
party status, to whom the notice is given, is required
to attend in person or through a representative
who has binding authority to make agreements
and undertakings on behalf of that party or person
respecting the matters addressed at the pre-hearing
conference;
c. Notice that if a person to whom the notice is given
does not attend in person or through a representative,
the conference may continue in the absence of that
person and that person will not be entitled to any
further notice in the proceeding;
d. Notice that some or all of the issues may be settled
at the pre-hearing conference; and,

SLQS JOURNAL
e. Notice that orders may be made at the prehearing conference that will be binding on all
parties, including parties added at the pre-hearing
conference, with respect to the proceeding, including
setting the dates for a hearing
During the pre-hearing, the tribunal shall check if the
documents that are transmitted are properly lodged,
received, and acknowledged by all parties and copies are
available in bundles in the required number. Minutes of
the preliminary meeting are a vital document too. This
would enable the tribunal to ensure that action has been
taken and complied with.
The tribunal shall issue a pre-hearing conference
memorandum setting out the results of the pre-hearing
conference, setting forth orders, agreements, and
undertakings made at the pre-hearing, and setting out
the dates of the hearing and the issues that are to be
determined.
After the pre-hearing conference has been held, no
substantive issues, other than those set out in the prehearing conference memorandum, may be raised or
addressed without leave of the tribunal.

Hearing

The hearing is normally held on a date fixed by the


tribunal, either at the request of one or both of the parties
or on its own initiative. The administrative arrangement
may be made by of the parties, normally the claimant
with the agreement of the other party.
An arbitration hearing can be either procedural or
evidentiary. As in court systems, a procedural hearing
focuses exclusively on how the proceedings are to be
conducted. By contrast, an evidentiary hearing is the
equivalent of what in the courts of many countries would
be called a trial, with the presentation of evidence in the
form of documents and witnesses. Although, evidentiary
hearings are generally available as a means to assist the
arbitral tribunal in deciding contested factual issues,
arbitration rules do not usually require them and leave the
means of decided disputed factual issues to the discretion
of the tribunal. Many decisions of arbitral tribunals are
made without any hearing at all. Arbitral tribunals can
make decisions solely upon documentary evidence, which
may or may not be accompanied by witness statements,
Witnesses statements represent the testimony a witness

June 2012

would give if called to testify, and on which the witness


is subject to questioning by the arbitral tribunal and, at
times, cross examination by the other party.
It is important to arrange the following in order to
conduct an efficient hearing whilst giving both parties a
reasonable opportunity to present their case.
a. Logistical matters. (a room for hearing,
accommodation for witnesses and experts)
b. Record keeping
c. Interpretation and translation
d. Refreshments
a. Logistical matters
The arbitral tribunal will decide and agree upon where
hearings and further meetings will be held. One or
both of the parties or the arbitral tribunal may book
the hearing room as appropriate. Usually [in two party
disputes are booked the rooms for the hearing.?] The
hearing will take place in one room, and another
two rooms will be allocated for each party for private
discussions and meetings and keeping related document
and accommodating support staff and a room for the
arbitral tribunal for private meetings and discussions.
b. Record keeping
Where the parties and arbitral tribunal have arranged
for the services of a tribunal secretary or transcribers,
records of the hearing shall be produced at the end of
each hearing day. The parties and tribunal will crosscheck
this document at the end of the each day. In addition,
stationary shall be available for the party counsels and
lawyers to take their own notes. Space shall be allocated
for the safe retention of the records and exhibits
presented and admitted, which remain in the custody of
the tribunal.
c. Interpretation and translation
In the event of the language of the arbitral proceedings is
foreign to one or more party or arbitrator, the service of
translators or interpreters will be allowed. The additional
costs of this service are to be borne by the relevant party.
d. Refreshments
Normally one of the parties will ensure that refreshments
are available during the hearing process.

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June 2012

SLQS JOURNAL
In addition to the above-mentioned logistical
requirements, the following procedural requirements
have to be maintained by the arbitrators. Matters of
procedure are normally determined either by the law of
the seat of the arbitration, or by the tribunal itself under
its own inherent jurisdiction (depending on national
law). Procedural matters normally include:













Mode of submitting (and challenging) evidence


Time and place of the hearing
Language and translations
Stenographic Recorder or Interpreter
Disclosure of documents and other evidence
Use of legal advisers
The appointment of experts and assessors
Maintaining timing
Maintaining what is agreed on in the pre-hearing
Cross-examination rules
Sequence of oral arguments and taking evidence
Oaths and affirmations
Expert witnesses
Default of a party

Arbitration Fees and expenses


The parties may make provision for the arbitrators fees
(although in some jurisdictions, whether the parties agree
to submit an existing dispute for arbitration, they may
not provide that each party bear its own costs). Although
the parties may provide differently in the appointment
of the arbitrator, the usual rule is that the parties are
jointly and severally liable for the arbitrators fees. If the
arbitrator is not paid, then they may sue either or both
parties for unpaid fees.
The expenses can be categorised into two elements
a) cost of the arbitration
b) cost of the parties
a) Cost of the arbitration:
This includes only the following:
i. The fees of the Tribunal
ii. The travel and other expenses of the arbitrators
iii. The cost of expert advice and of other assistance
iv. The travel and other expenses of witnesses approved
by the tribunal
v. The cost of legal representation and assistance
vi. Any fees and expenses of the appointing authority

30

b)Cost of the parties:

This includes the following:


i. Expenses of lawyers.
ii. Money spent on preparing and presentation of the case.
iii. Cost of stenographic records or other type of
recording of the proceedings,
iv. Cost of interpreters, translations or security measures
v. Other professional fees and expenses: accountants,
expert witnesses, hotel, travel expenses.
vi. Copying and bundling charges.
vii. Expenses of telephones, fax, electronic mail.
viii. Legal costs and expenses.
ix. Executive time.
In many jurisdictions, after making the award, the
tribunal will order that the losing party pays the legal costs
of the winning party, and this may include the arbitrators
fees. However, this does not affect the joint and several
liabilities referred to above; but it does mean that the
winning party may maintain a separate action against the
losing party for the unpaid costs, or to be reimbursed for
arbitrators fees that the winning party has been forced to
pay, but which the losing party was ordered to pay.
The expenses of witnesses called by any party shall be
paid by the party calling such witnesses. The parties shall
be jointly and severally liable for all other expenses of
the arbitration, including the fees and expenses of the
arbitrator, the expenses of any witnesses or the cost of
any proof produced at the request of the arbitrator, and
the fees and expenses of the Institute, unless they agree
otherwise or the arbitrator in the award apportions such
costs or expenses differently. The Institute may require the
parties to deposit in advance such amounts as it considers
necessary to defray the costs of the arbitration. Upon
completion of the arbitration and delivery of the award
the Institute shall provide an accounting to the parties.
BIBLIOGRAPHY:

i.
UNCITRAL Arbitration Rules (1976) United Nations (UN)
ii. UNCITRAL Model Law on International Commercial
Arbitration ( United Nations Document A/40/17, Annex 1)
iii. Introduction to International Commercial Arbitration, Dr
Emilia Onyema
iv. Construction Arbitration Second edition 1998, Vincent Powel
Smith, John Sims and Christopher Dancaster Publisher:
Blackwell Science
v.
Handbook of Arbitration Practice, Second edition 1993, Ronald
Bernstein, Derek Wood Publisher: Sweet and Maxwell
vi. Law and Practice of International Commercial Arbitration, Third
edition, 1999, Alan Redfern and Martin Hunter Publisher:
Sweet and Maxwell

June 2012

SLQS JOURNAL
Which Procurement Route?
Prasanna Jayaweera
B.Sc (Hons) QS, MRICS, CCC, ICIOB

Senior Quantity Surveyor, Parsons Overseas Limited.

Abstract
Procurement Strategy and Procurement Route are
two popular terms encountered in the construction
industry. What do they mean? Some may argue that
both have the same meaning. However, it is not so. As
defined by the United Kingdoms Office of Government
Commerce (OGC), Procurement Strategy identifies
the best way of achieving the objectives of the project
and value for money, taking account of the risks and
constraints, leading to decisions about the funding
mechanism and asset ownership for the project. The aim
of a procurement strategy is to achieve the optimum risk,
control and funding for a particular project.
Overall Procurement Strategy includes a number of
aspects like the working arrangement (procurement
route), Tendering Process (Method of contractor selection)
and Form of Contract to be used, etc. Therefore, the
Procurement Route is a part of the Procurement Strategy
that delivers the overall Procurement Strategy.
Selection of a suitable procurement route is of paramount
importance for the success of any development. In this
process, there are a number of parameters like project
objectives, market conditions, internal regulations of the
Employers organization, etc. to be considered. On the
other hand, several procurement routes are available in the
industry. Each of these routes will suit certain situations
and has their own advantages and disadvantages,
including different ways of risk allocation between the
parties. The identification of applicable parameters to any
particular development project, analyzing their priority,
evaluating alternative procurement routes and selecting
the best procurement route to cater to those identified
project parameters is the key to success.

The development project considered in this article is a


part of the large mixed use development project in Dubai,
United Arab Emirates. The overall project included the
development of a canal which turns the whole project
site into to a number of islands. The infrastructure
works of the whole of the project and the canal works
had already been completed. This article only focuses
on the procurement of the building works. The part of
the overall project considered in this article was called
Advanced Product and was to be constructed earlier
than the whole project and supposed to be a model of
the overall project. It had a total built-up area of 520,270
m2 covering office, residential, food and beverage, retail,
circulation, service areas and parking areas, etc.
This article is intended to identify Employers needs,
project objectives and the best way of achieving the
objectives of the project, taking account of the risks
and constraints, and ultimately achieving the optimum
balance of objectives, risks and control.

Identifying and prioritizing project objectives


and restraints
The first step in selecting a suitable procurement method
was to identify and prioritize the project objective and
the restraints to be identified in consultation with the
Employer. Then these objectives and restraints were
prioritized with an in-depth assessment of them in order
to reach the optimum compromise between these overall
project objectives and restraints. Accordingly, they were
prioritized in three categories as the highest priority,
medium priority and the lowest priority.
Highest Priority
Keeping the overall time from the start of the design to
the project completion as a minimum.

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SLQS JOURNAL

Due to the high demand in the market it was one


of the Employers highest priorities that the project
would be delivered in the shortest possible time.

Achieving the pre-determined milestones by the


Employers development team.

The Employers development plan had already set


the following project specific milestones.

Start enabling works including shoring, excavation


and dewatering - within 4 months.Commencement
of Main Construction works - within 6 months.

The Employers objective was to minimize the


overall duration between the commencement of
design work and the actual site possession by the
Main Contractor. This was due to the fact that it
would attract more investors by boosting their
confidence that the project would be completed
on time. Therefore utilization of early packages and
concurrent engineering between the design and
construction activities were very important.

Certainty about the time for completion of the project.


Time certainty was also identified as a critical factor.


Since this development was to be delivered to the
potential buyers on time, certainty about time was
very important to the Employer.

Assuring the Quality of the design and quality of the


construction.

Quality of the works and quality of concept design


and aesthetics were considered as influencing factors
of high priority. Quality of the Project shall reflect
the project importance and the satisfaction of
the Employer and other stake-holders. Since this
was the Advanced Product of the large overall
development, the quality of this work was very
important for a good image and the attractive sales
income from the overall project.

Keeping the Contractual Relationships as simple as


possible.

32

Less complex contractual arrangements and single


point responsibility for construction were two
requirements of the Employer.

Medium priority
Certainty about the project cost.
Cost certainty was also a very important factor
considering the fact that the project budget was
dependent on the Employers business plan.
Therefore, any measures that could give cost
certainty prior to the Employers commitment to the
Contract and control costs of the project effectively
would be of high importance
Price competition and obtaining lowest possible tender
price.

Price competition among the tenderers was very


important to obtain a good market price. In
addition, internal financial regulations of the
Employers organization required a minimum of
three (3) quotations prior to the appointment of any
Contractor.

Lowest Priority
Flexibility in accommodating future variations.

It should be possible to accommodate the variations
that would become necessary due to insufficient
tender information from the design team at the
tender stage and variations due to future design
changes. Further, there shall be the flexibility in
catering to the changes that might be initiated by
the potential buyers / investors.
Early involvement of the Contractor and getting the
benefit of his know-how to improve buildability in design

The Employers wishes to have the Contractor on


board as a part of the building team. The Contractors
involvement in the early stage of the process and the
design gets the benefit of the Contractors knowhow in achieving buildability solutions.

Overview of the available Procurement Routes

Of many procurement routes practised in the industry


the following four main procurement routes have been
considered for this project.
The Traditional Method
The Traditional Method is characterized by the fact that
the design is fully completed by the time a Contractor
is appointed (refer Figure No 2). In this method the
Employer appoints an Architect/Engineer as his principal
agent together with a team of consultants (comprising an
Architect, Engineer, Surveyor, and so on) to prepare the

June 2012

SLQS JOURNAL
Figure No. 1 Prioritizing project / Employer requirements and constraints
High Priority

No

Priority 1 (Highest priority)

Overall time from start of design to completion to be kept to a minimum.

Achieving the pre-defined project specific milestones utilization of early design packages and concurrent engineering (refer section 4.4)

Time certainty prior to Employer commitment to Contract.

Required quality of end product is assured.

Contractual relationships shall be relatively simple (with single point responsibility for construction)
Priority 2 (Medium priority)

Cost certainty prior to Employers commitment to Contract.

Price competition (minimum of 3 quotations)


Priority 3 (Lowest priority)

Lower Priority

Flexibility for future changes (variations due to Employer changes and design
related changes)

Early involvement of the Contractor and getting the benefit of his know-how to
improve buildability in design

tender documents. These include the complete design


drawings, specifications, Bills of Quantities (BOQ),
and other tender documentation to allow the selection
of a Contractor. In this method a number of prequalified Contractors will be invited to submit a price for
completing the project within a pre-defined duration by
pricing the measured BOQ and other tender documents
prepared by the Engineer / Quantity Surveyor. The
Contract is generally awarded to the Tenderer with the
most competitive tender offer.
The Employer would expect the Contractor to provide a
firm price within four to six weeks. The Employer having
evaluated the tenders, the most suitable Contractor will
be appointed to carry out the construction.
This procurement route requires a fully detailed design
prior to tendering. All major decisions of the Employer
shall ideally be made prior to tendering, although
provisional sums can be used for parts of the works of
which the design has not been finalized. The project cost
can be easily estimated, planned and monitored by the
Quantity Surveyor from the inception stage through to
the completion of the project.

Main advantages
1. Competitive fairness as the complete design provides
a clear equal basis for tenderers.
2. Relatively low tender preparation costs to the
Contractor.
3. Changes can be easily introduced during design and
full cost impact can be envisaged.
4. The project is clearly defined. Therefore, there is
a greater certainty about the overall cost and time
before the Employer commits himself to contract
and penalties for late completion can be properly
established.
5. Design is fully prepared before commencement of
work on site. Hence proper coordination of different
trades is possible.
6. Construction costs are likely to be lower than other
methods of procurement since the Contractor can
assess the extent of his scope and potential risks at
the tender stage.
7. A detailed basis exists for evaluating future time and
cost variations.
Main disadvantages
1. Slow to start on site. (Construction is not concurrent
with design development).
2. Design risk rests with the Employer.

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SLQS JOURNAL
3. The time period from the start of design to
completion of the construction is longer than the
other methods.
4. The design process does not get the benefit of the
Contractors involvement with the design team
in achieving compliance with the cost plan or
buildability solutions.

Design and Build

The Design and Build procurement route is characterized


by the development of tender documents which describe
the Employers requirements, but do not provide a fully
developed design solution before the Contractor is
appointed (refer Figure No. 3).
Tender documents usually take the form of a design
brief, advanced to an outline scheme design or even
the scheme design stage, which could describe building
functions, the required floor areas, services performance
criteria and basic finishes, etc. A single Contractor is then
appointed (either by limited competitive tendering or
through negotiations), who will develop and complete
the design solution to fulfill the Employers requirements,
by employing his own design team to do so.
A main feature of this method is simplified contractual
relationships as the Contractor is appointed to take sole
responsibility for design and construction. The tenders
are obtained based on the Employers requirements which
can be simple or detailed. The Contractors then respond
with their tender proposals which include design and
construction.
The Design and Build Contractor provides a single point
of responsibility to the Employer for delivering to time,
cost and stated quality, thereby simplifying the process

34

June 2012

from the Employers perspective. However, Design and


Build offers only little flexibility for making changes,
which can be both costly and causing programme
implications. This arrangement requires greater control
of the Employers requirements and a clear statement of
his requirements at the outset.
The Contractor is responsible for design, construction
planning, organization, and control. These activities can

proceed concurrently to a greater extent than is possible


with the Traditional Method. Accordingly Design and
Build projects show some characteristics of fast track
construction when required. Works on the site can be
commenced as soon as local authority approval has been
obtained and sufficient information regarding the early
site operations is available. The design does not need
to be finalized before at least some of the works on site
commence.
Main advantages
1. There is a single point of responsibility for design
and construction; hence team work and nonadversarial attitudes are encouraged.
2. The design process benefits from the Contractors
involvement with the design team in
achieving
compliance with cost plan or buildability solutions.
3. Cost certainty prior to Employers commitment to
the Contract.
4. A larger element of risk rests with the Contractor.
5. The overall time for start of design to completion
can be kept to a minimum.
Main disadvantages
1. Design is not fully prepared before commencement
on site and therefore the potential changes and
variations later required by the Employer can be very
costly and may prolong the construction period.

June 2012

SLQS JOURNAL
2. Difficult to compare tenders and evaluate for
competitiveness where widely differing design
solutions are introduced by the tenderers.
3. Difficult to ensure the required quality of the end
product.
4. Placing a larger risk (both design and construction)
with the Contractor can result in overpricing of the
risks and greater cost to the Employer.

Management Contracting
The Management Contracting procurement route
is characterized by the Employers appointment of a
Management Contractor early in the process to advise
on the design programming and buildability (refer Figure
No. 4). The Management Contractor divides the works
into packages, programmes and obtains tenders for
them.. Then the work packages are let on a competitive
tender basis on lump-sum, firm-price contracts entered
into with the Management Contractor.
Works can be commenced as soon as the Employer
has approved the design proposals. In this method the
Management Contractor is appointed much earlier
than the Contractor in the Traditional Method. He
becomes a member of the design team and contributes
his construction knowledge and management expertise.

Main advantages
1. Facilitates fast rack development.
2. The design process benefits from the Management
Contractors involvement with the design team in
achieving compliance with cost plan or buildability
solutions.
3. Concurrent construction and design is inherent
resulting in overall time saving.

4.

Late changes can be easily accommodated as work is


let on a package by package basis.
5. Both the Management Contract and Package
Contracts are let competitively (price competition).
6. Unlike in Construction Management, single
point of responsibility lies with the Management
Contractor and the Employer has the benefit of a
simple contractual relationship.
Main disadvantages
1. Minimum risk to the Management Contractor and
higher risk to the Employer.
2. No time or cost certainty prior to Employers
commitment to the Contract.
3. Design is not fully prepared before commencement
on site, therefore more potential for changes and
variations.

Decisions regarding the appointment of sub contractors


are made jointly (by the Designers, Employer and the
Management Contractor) thus making use of a wider
range of experience.

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SLQS JOURNAL

Construction Management
The Construction Management procurement route is
characterized by the appointment of a construction
manger to advise the Employer on a fee basis (refer
Figure 5). The Employer then independently enters into
Contracts with numerous trades (package) Contractors
rather than with a main Contractor (as in Management
Contracting). This needs closer involvement of the
Employer with the project throughout its life. The lines of
communication between the Employer and the package
Contractors carrying out the work packages are shorter
than with other systems, thus ensuring a faster response
for matters that require the Employers decisions.
As a member of the design team, the Construction
Manager would be expected to co-ordinate the design and
construction programmes and ensure that the interfaces
between trade packages were properly considered. This
arrangement can place the Employer at considerable risk.
The Construction Manger, who is appointed for a fee
with no contractual risk with trade Contractors, will be
responsible for planning, management and co-ordination
of the project and for establishing competitive bids for
all elements of the work. The actual Contracts are then
placed directly by the Employer.
The Construction Manager acts as the main Contractor
but he does not carry out any construction activities;
instead he manages and co-ordinates the performance of
the trade Contractors.

36

June 2012

Main advantages
1. The best price is obtained for each package Contract
through competitive tendering which will help to
control the overall price to some extent.
2. Facilitates fast track development.
3. The design process benefits from the Construction
Managers involvement with the design team in
achieving compliance with cost plan or buildability
solutions.
4. Concurrent construction and design are inherent
resulting in overall time saving.
5. Late changes are easily accommodated as work is let
package by package.
Main disadvantages
1. No cost certainty at the outset.
2. Minimum risk to the Construction Manger and
higher risk to the Employer.
3. No time or cost certainty prior to the Employers
commitment to Contract.
4. Design is not fully prepared before commencement
on site, therefore more potential changes and
variations.
5. The Construction Managers liability to the Employer
for the performance of the works Contract is limited
to the amount recovered from the defaulting trade
Contractors.
7. Needs effective control of time and information.
8. Contractual relationships are complex.

SLQS JOURNAL

Selection of Suitable Procurement Strategy


Having reviewed the advantages and disadvantages
of the above four different procurement routes and
compared them with the list of project objectives and
restraints a suitable procurement route was selected. The
design and built procurement route was not considered
in this final selection as the project concept design was
almost completed and the project was a part of the main
development which had its own theme and architecture.
The remaining three main procurement methods were
evaluated against the list of the project priorities that had
been identified based on the discussions with the Employer
(refer figure No. 1] Comparision of the Procurement
Route). The objectives and restraints were given the
weighting factor so that those with the highest priority
get 5, medium priorities get 3 and normal priority gets
1. Then each procurement route was assigned with marks
from 1 to 10 as per their suitability to accommodate each
objective / restraint. This scoring matrix was prepared in
order to demonstrate the suitability of each procurement
route in different situations and to select a suitable method
accordingly. However, it is advised that the selection of a
procurement method shall not be based only on such a
scoring system which can be subjective. Instead it should
be also based on consideration of the objectives and
restraints of the particular project with each procurement
method considered with some common sense and
professional experience.
It was noted that the Traditional Method takes the longest
duration from the commencement of the Design to the
completion of the construction. Further, it was unable to
provide early engagement of the Main Contractor on site.

June 2012

It is seen from the Comparison of the Procurement


Route table that Management Contracting was the
most suitable procurement route for the project. On the
other hand, the Management Contracting minimizes the
overall time from start of design to project completion.
It has the highest potential to achieve the predefined
milestones of early commencement. Another benefit of
Management Contracting is that the package contracts
for various trades can be awarded to package Contractors
who are specialized in that trade. Also, in this method the
Management Contractors know-how can be utilized in
project design development.
It is noted that the Construction Management route
was also capable of catering to most of the project
requirements. But it places a huge contractual burden on
the Employer. It requires the Employer to enter into a
number of direct Contracts with package Contractors.
This may take the Employers valuable resources to be
engaged with these contracts. Also, there is no single
point of responsibility for Construction.
Accordingly, Management Contracting was identified
as the most suitable procurement method in this project
scenario. However, it has the following disadvantages that
have to be controlled and minimized.
01. There is a high risk to the Employer as to cost
certainty.
02. Overall cost is higher than the Traditional method.
03. The success of the project depends largely on the
Management Contractors managerial skills.

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June 2012

SLQS JOURNAL
Figure No Comparison of the Procurement Routes
No

Project Objective / Restraint

Construction
Management

Traditional
Method

Management
Contracting

Priority 1 (Highest priority)


1

Overall time from start of design to completion to be kept to a minimum.

10

10

Achieving the pre-defined project specific milestones utilization of


early design packages and concurrent engineering (refer section 4.4)

10

10

Required quality of end product is assured.

10

10

Time certainty prior to Employer commitment to Contract.

Contractual matters shall be relatively simple (with Single point responsibility)

10

10

Sub Total

34

26

43

Weighted Sub Total (Sub Total x 5)

170

130

215

Priority 2 (Medium priority)


6

Cost certainty prior to Employers commitment to Contract as project


budget is fixed.

Price Competition (minimum of 3 quotations)

10

10

10

Sub Total

11

19

12

Weighted Sub Total (Sub Total x 3)

33

57

36

Priority 3 (Normal priority)


8

Flexibility for future changes (variations due to buyers / investors changes and design related changes)

10

Benefit of Contractor involvement in design process for the buildability


and practicality of design alternatives.

10

10

Sub Total

19

11

18

Weighted Sub Total (Sub Total x 1)

19

11

18

Grand Total

222

198

269

Note: Each item is awarded a points score out of ten. A higher score implies greater advantages.

Conclusion
The selection of a suitable procurement strategy is a key
factor in successful project delivery. It has to be done
carefully by analyzing the project requirements and
available procurement routes, their characteristics and
striking a compromise between project requirements. The
project considered in this paper is an advanced phase of
a large mixed use development project. Accordingly, the

38

project objectives have been identified and prioritized.


Major procurement routes of the Traditional method,
Design and Build, Management Contracting and
Construction Management have been considered for the
project.
Out of these procurement routes it has been evident that
Management Contracting is the most suitable method
of procurement. It meets many of the Employers high

June 2012

SLQS JOURNAL
priority requirements, including achieving project
milestones and commencing construction early. Though
the Construction Management route is also capable of
catering to most of the project objectives / restraints, it
places a huge contractual burden on the Employer.
Though Management Contracting is recommended as
the most suitable route of procurement for this project,
the Employer is warned about certain disadvantages
inherent in Management Contracting. Therefore, it is
recommended that these disadvantages and risks are
carefully monitored, controlled, transferred through
possible means or any unfavorable impact of these
disadvantages minimized.
The above scoring matrix was prepared in order to
demonstrate the suitability of each procurement route.
However, it is advised that the selection of a procurement
method shall not only be based on such a scoring system
but also on some common sense and professional
judgment.

6.0 Bibliography
1. Amos, S.J., 2007, Skills and Knowledge of Cost
Engineering, AACE International.
2. Ivor H. Seeley, 1984, Quantity Surveying Practice,
the Macmillan Press Ltd.
3. Keating Donald, 2001, Keating on Building
Contracts, Sweet & Maxwell Limited.
4. M Skitmore, DE Marsden, 1988, Which
procurement system? Towards a universal
procurement selection technique, Construction
Management and Economics, 1466-433X, Volume
6, Issue 1, pages 71 89.
5. RICS, 2003, The Surveyors Construction
Handbook, Royal Institute of Chartered Surveyors.

HDK Ltd (t/a Unique Home) v Sunshine Ventures Ltd


Queens Bench Division- 23 November 2009
Keywords: Additional claims; Breach of contract; contracts; Defects; Defects; Non-completion;
Repudiation
Summary: Wrongful determination of a contract on the basis of a failure on the part of the contractor
to complete the work in time and in relation to defects in the work carried out.
Abstract: Claimant claimed chargesfor breach of contract from thedefendant. Defendant counter
claimed for damages for balance of money due to him. There was lack of documentation providing
evidence of the terms of the agreement. Claimant requested to compete the outstanding woks as soon
as possible after 2 months contract was terminated.
Held: Claim and the counterclaim dismissed. The correspondence on behalf of the claimant /
defendant had failed to address the necessary ingredients of notice making time essence. Defendant
would have been bound to have completed all the works for which he had contracted but he had been
relieved from these obligations from a wrongful termination. Therefore, wrongful determination of
the contract provided a complete answer for the claims against defendant in respect of incomplete
or alleged defective works.

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June 2012

SLQS JOURNAL
On and Off Site Recoveries
Vajira Kosala Hettiarachchi
Quantity Surveyor
Rotary Gulf Limited Electro-Mechanical Works LLC
Abu Dhabi

Introduction

The Prolongation Cost Claim

In most cases the above will not occur as expected due


to various reasons such as Works getting delayed and the
Contractor not being able to finish the Scope of Works
within the time frame allocated. Accordingly, time for
completion becomes extended or prolonged.

Contractors contract administrator needs to secure the


contractors rights in order to obtain approval for his
claim. First the contractor has to study and understand
the whole of the contract documents including drawings
and specifications, Bills of Quantities with a knowledge
of the Method of Measurement and Conditions of
Contract. Then the Contractor is issued a notice to
reserve his right including the facts which are relevant
to the delay to demonstrate his entitlement. Detailed
particulars are the contemporary records specific to the
delay which is separated according to each event of delay.

Time is an essential and important factor in any


construction project. At the time the project starts, any
Employers main aim is to complete the Works successfully
within the specified time period which is called Time for
Completion. Normally this is given in the number of
dates. The time factor starts from the Commencement
Date and upon substantial completion of the Works, the
Employer will take over the works and issue the Taking
Over Certificate to the Contractor, subject to a defects
liability period.

A delay can occur for many reasons. The Employer and


Contractor or any other factor can be held responsible
for the delay in completion of Works. Such delays are
called culpable delays.
If the Employer is culpable for the delay such as the
Engineer not issuing drawings on time, the Employers
direct contractors hindering progress, etc, then Contractor
is not responsible for the delay. Then contractor is entitled
to an Extension of Time. Also, the contractor will be
entitled to the prolongation cost for the prolonged time
period.
In the event of any delay under the contractors culpability
then liquidated damages will be deducted from the
Contractors payment certificate by the Engineer since
the contractor is depriving the Employer of his earnings
in the prolonged time period.

40

The prolongation cost claim includes all the costs incurred


during the prolonged time period. The costs include all
the costs incurred or are to be incurred both on and off
site including overhead and other charges, in FIDIC
(Fdration Internationale des Ingnieurs-Conseils)
type of contracts. Items such as idle hours, abortive
works, financing charges due to reduced revenue, loss of
productivity, subcontractors claim, late release of retention,
site overhead costs for the prolonged time period, etc, will
be included in the prolongation cost claim.

Sometimes the specific contemporary records cannot be


maintained in a construction project. In such situations
general contemporary records such as signed daily diaries
of the key persons (Resident Engineer), Minutes of
Meetings about delays, site overheads records during the
prolonged time period can be used.
There are two main heads of loss and expense that are
usually considered in the event of a delay:
On-site costs -The cost of on-site maintenance
which is exclusively attached to the particular
contract
Off-site costs -The cost of financing head office
overheads

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Site Overheads

The Contractors indirect expenses which are directly


charged to the particular project are called preliminaries
or general Items. On-site overheads cover the cost of the
items a contractor must provide during construction,
including:






Salaries of site supervisory staff and labourers


including accommodation and travelling expenses
General construction plants and small tools
Supply and maintenance of scaffoldings
Services such as water, electricity and telephone
services, etc.,
Site office, workshops and storing facilities
General Site office expenses including photo
copying, consumables
Bonds and Guarantees, etc.

Actual costs

The right method of assessing on-site costs due to a delay


is to evaluate the actual costs incurred. Therefore, the
contemporary records will play a vital role in justifying
the claim and the Engineer should audit all costs that
should be included in the direct costs with regard to the
particular construction activities.

The actual cost of staff and labour will generally be


provided by wages or salary sheets and the cost of all
external plant and services will be substantiated by
invoices. Where contractor- owned plant is involved,
invoices are not likely to be available, so an analysis of the
costs claimed will have to be made separately.
Where the Principal has maintained good site records, the
checking of the actual times claimed against a contractors
records is the ideal way of establishing costs and the best
way of accurately assessing the costs.
A contractor is required to mitigate costs in the event of
delay. Excessive expenditure due to poor management
or inefficiency, if proven, is not recoverable. Specific
instances of obvious waste or mismanagement would
need to be identified in the costs or noted from site
observations.
Figure 1 below shows the actual preliminaries graph for a
project time period. The area below the curve shows the
total cost of the preliminaries for the project time period.

Figure 1: Site Overhead Cost Distribution

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SLQS JOURNAL
In general, interim payments for the preliminaries for
a contractor will be calculated based on the pre-agreed
preliminary split which identified the mobilization,
demobilization and running costs, etc. which is shown
in the above diagram by a dotted line as an average. For
instance, consider any delay that occurs at point C in the
above graph, and the project cost remains constant during
the time period D and curve shifts as shown. In the
event of the Employers culpable delay the contractor will
be paid the actual time related cost which is equivalent
to the rectangular area B. However, the actual cost
incurred due to the delay is equivalent to the rectangular
area A which is much larger than area B.

Off-site costs (Head Office Overhead)

The amount required to support the head office expenses


during the prolonged period for the particular project is
considered as Head Office Overhead..
Head Office Overhead depends on the total general and
administrative cost of the head office during the period.
In addition, the number of projects going on during the
same time period is also considered. The Head Office
Overhead cost percentage is determined depending on
the above factors.
If particular head office overheads are proved to have been
increased by a delay then they are recoverable.
By multiplying the total cost by the overhead and profit
(OHP) percentage, OHP can be calculated. However, this
practice is a wrong practice followed in the construction
industry and the facts that prove it is wrong are discussed
in detail below.
The following section discusses the various internationally
acceptable facts which constitute the Head Office
Overhead cost in the construction industry. Even though
they are acceptable, the Engineer is required to be very
vigilant as described below when auditing those scenarios.
Executive and administrative staff salaries and allowances
are acceptable Head Office Overhead costs. The particular
staff shall not be dedicated to a particular project but to all
projects. If that is the case the percentage on head office
dedication should be considered. Rent and maintenance
charges and insurance bonds related to head office are
also considered.

42

June 2012

Utility bills such as phone, fax, and bank charges are


acceptable Head Office Overhead costs. Depreciation
of company assets and furniture and equipment are not
capital expenditure but the depreciation value is included
in the Head Office Overhead cost. Some companies
print their stationery in bulk, for instance, the stationery
required for the next 10 years. In that situation the
particular time period has to be considered for Head
Office Overhead cost calculations.
Further, travelling charges both local and international
including vehicle maintenance and fuel relevant to the
particular project are accepted Head Office Overhead
costs. Sometimes companies need a management
consultant to build up the Quality Management Process
in the company. Such professional consultancy fees also
accepted as the Head Office Overhead costs. But it is
important that a claim for the consultants cost for a
project will not be a Head Office Overhead cost, whereas
it is included in the project cost. Auditing expenses and
marketing expenses, for example, advertising are another
acceptable Head Office Overhead cost.
Generally, very few projects may be won by a company
out of a number of projects for which it bids. The
company has the opportunity to include all tendering
costs in the Head Office Overhead cost of the winning
projects. The interest on company borrowings amount
shall not be included in the Head Office Overhead . In
the event of the final account not being settled, there is
an amount that exists due to a dispute between Employer
and Contractor which will considered as a provision in
the account until it is settled. This is called a bad debt and
the bad debts of other projects should not be considered
in the Head Office Overhead cost.
Entertainment costs, professional membership fees, for
instance RICS or AACEI membership, or licensing fees,
professional training fees are among other acceptable
Head Office Overhead costs of the Company. Sometimes
those sponsorship fees are paid based on the profits earned
by the Company. Accordingly, it is not considered as a
Head Office Overhead and the above cost is considered
a share of the profit. Therefore, it will not be considered
as Head Office Overhead . Idle resources of the Head
Office are also acceptable Head Office Overhead costs
except the project related staff and plant, for instance, the
asphalt plant during the intermediate stage between two
projects.

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Formulas for recovery of Head Office Overhead
in a delay event

There are several formulas frequently used by contractors


for the purpose of calculating the recovery loss of off-site
overheads due to a delay event.
As an example, consider a project which has a contract
price of $ 3,000,000.
Lets say the above project has an original duration of 300
days and a delay by 30 days has occurred due to some
reason

H.O. &
Additional
= Profit % X Contract Sum X
Payment Due 100
Contract Period
(Week)

Where; H.O. & Profit % = the percentage of Head


Office Overheads and Profit allowed in the Tender/
Contract
The segment,
H.O. & Profit %
100

The Head Office Overhead cost can be calculated for


the prolonged time period of 30 days by the following
formula:
Contract Price x HOOH %
X
Time for Completion

Period of Delay

By applying the example figures to the above equation;


=

3,000,000 x 10 %
300 days

Contract Sum,

represent the allocable Overhead


Portion (AOP)

To apply this formula a reasonable H.O. & Profit % is


necessary which is not easy to derive as aforementioned.
In addition to the Hudson Formula, there are Emden,
Eichleay, and Hanklaan formulas also in practice to
calculate the Head Office Overhead recovery in case of
a delay event.

Figure 2: Project Timeline

Period of
Delay
(Weeks)

Emden derived the Head Office Overhead percentage


by dividing the total overhead cost and profit of the
contractors organization by total turnover which is
called h. The Emden Formula calculates the Additional
Payment due by;
h
100

30 days

The above formula will give the Head Office Overhead


cost as $ 30,000 to be included in the EOT claim. But
to derive this figure a reasonable percentage of Head
Office Overhead cost cannot be easily extracted from
the total contract sum. This is because normally bidders
spread Head Office Overhead throughout the rates,
preliminaries, etc. The above formula was introduced by
Mr. Alfred Hudson in 1891 in his famous book Hudsons
Building and Engineering Contracts, which is called the
Bible of Contracts Administration.
Hudsons formula can be written as follows:

Contract Sum
Contract Period
(Week)

X Period of Delay
(Weeks)

Eichleay formula

Eichleays formula was developed by Eichleay of the


United States in the Appeal of Eichleay Corporation,
and approved in the United States case of Capital Electric
Company v United States.
Step 1
Contract Billings
Total Contract Billings for the Contract
Period

Total Head Office

X Overhead for the =


Contract Period

Allocable
Overhead

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June 2012

SLQS JOURNAL

Consider 4 numbers of projects are going on


during the EOT period of a particular project.
Time lines are shown in Figure 3.

Step 2
Allocable Overhead
Days of Performance

Daily contract Head


Office Overhead

Step 3
Daily contract Head
Days of
Additional
X Compensable Delay = Payment Delay
Office Overhead

Hank Laan Formula


Contract Billings
Total Company
Billings

Total Head Office

Additional

X Overhead (During = Payment Delay


the period of delay)

However, all those formulas have several


weaknesses as well as they produce erroneous
answers which have to be justified with many
arguments. Therefore, to avoid these weaknesses
in the above formulas a new formula was
introduced by Prof. I. Samarathunga during his
recent research.
Samarathunga formula;
Additional
Payment Due = H x

CP
SCP

Where; H is the actual total overhead cost of


the Head Office during the Extension of Time
(EOT) period; and CP is the contract price of
delayed project divided by its original time for
completion and multiplied by the EOT period.
SCP is the sum total of the contract price of
each of concurrent project divided by its original
time for completion and multiplied by whole
part or period of EOT of the delayed project.
Example calculation of Head Office overhead
using the Samarathunga formula:
44

Project 1 which, is the delayed project EOT


period of 20 days, and $ 50 million
worth of project with the original
Time for Completion of 50 days
Project 2 $ 50 million worth of project with
the original Time for Completion of
50 days
Project 3 $ 30 million worth of project with
the original Time for Completion of
60 days
Project 4 $ 80 million worth of project with
the original Time for Completion of
40 days
For project 2, the whole delay period lies inside
the period, 5 days of project 3 lie inside the
EOT of Project 1 and project 4 has 10 days.
Now our SCP calculation comes
For project 1 = ($ 50m 50days) 20 days

= $ 20m
For project 2 = ($ 50m 50days) 20 days

= $ 20m
For project 3 = ($ 30m 60days) 5 days

= $ 2.5m
For project 4 = ($ 80m 40days) 5 days

= $ 10m

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Figure 3: Project time line

Now SCP can be calculated as


=
$ 20 + $ 20 + $ 2.5 + $ 10
=
$ 52.5
Also CP
=
($ 50m 50days) 20 days
=
$ 20m
For instance, the actual Head Office overhead cost for the EOT period is $ 500,000 found from
the Head Office accounts records.
So our Head Office overhead recovery can be calculated by using the Samarathunga formula as,
Head Office overhead recovery
=
$ 500,000 ($ 20 $ 52.5)
=
$ 190,476
Conclusions

Head Office Overhead costs are subjective and


not a straightforward calculation. Therefore,
numerous formulas were introduced in the
construction industry. However, all of them
have encountered crucial defects while each
formula is attempting to provide an answer to
the same question but each l producing different
figures which differ broadly in values.
Comparing all the formulas introduced so
far with regard to Head Office Overhead

calculations Prof. Samarathunges formula which


was introduced recently is more reasonable in
calculating Head Office overhead recovery in
the event of prolongation cost calculations.
However, it is noted that none of the above
formulas will give an approximation of the
true Head Office Overhead recovery in delay
situations. Therefore, it is advisable to use the
formulas in an appropriate manner.

45

June 2012

SLQS JOURNAL
Prevention Principle
Senerath Wetthasinghe
LL.M., AIQSSL, AAIQS, MQSi, FCIArb
Director
Cost Engineering Services (Pvt) Ltd
Sri Lanka

1. Rationale for the Principle


In the construction industry, there are numerous
instances where acts or omission of one party have
hindered the other party from completing its obligations
within the stipulated time. In such instances, a question
arises whether the party responsible for the impediment
can insist on the other party to perform its obligations
or alternatively, recover damages liquidated or unliquidated for non-performance. This matter was
considered in Holme v Guppy1 where the defendant
sought to deduct liquidated damages from the plaintiff
contractor for delaying the completion of joinery work in
a brewery, which was agreed would be completed within
a period of four and a half months without any extension
of time provision, despite the contractor being prevented
from starting the work by the defendants other workmen.
Park J delivering his judgment said:

There are clear authorities that if a party be prevented,


by refusal of the other contracting party, from completing
the contract until the time limited, he is not liable in
law for that default.

This principle is widely known as the prevention


principle, which, arguably, had first been stated in the
Comynss Digest2 and emanates from a disliking of the
courts, in the nineteenth century, for liquidated damages
provisions in contracts, which they viewed with greatest
suspicion3.
Affirming the prevention principle, Denning LJ in
Amalgamated Building Contractors Ltd v Waltham Holy
Cross Urban District Council 4 said that the building
owner could not insist on a condition if it was his own
fault that the condition had not been fulfilled.

46

Legal authorities have alternatively expressed this


principle as a party cannot benefit from its own breach.
The prevention principle was so expressed by Besanko J in
his judgment in the Australian case SBS International Pty
Ltd v Venuti Nominees Pty Ltd 5, where he said:

There is relatively little difficulty in applying the


principle of prevention in cases in which the principal
is responsible for all of the delay. In those circumstances,
the principal cannot recover because it cannot benefit
from its own wrong.

Further, in SMK Cabinets v Hili Modern Electrics Pty Ltd6


the court held that some broad notion of justice as that a
man should not be allowed to recover damages for what
he himself has caused.
The essence of the prevention principle, therefore, is that
a party cannot impose a contractual obligation on the
other party where it has impeded the other party from
performing that contractual obligation7 or alternatively,
one cannot benefit from its own wrong.
Consequently, if the employer impeded the contractor in
executing its obligation under the contract, in the absence
of a contractual provision to fix a new completion date,
the employer could not impose liquidated damages if such
impediment prevented the contractor from completing
the work within the time for completion8.
A debate as to the basis of the prevention principle9 is
prevailing in legal circles. In his judgement in SBS
International10, Besenko J said that the basis of this
principle had been variously described as:

an implied term,
implied supplement contract,

June 2012

SLQS JOURNAL

waiver, or
estoppel.

Further, it was described as, probably, a rule of


construction and not an absolute rule of law11.
Irrespective of the basis of the prevention principle, this
principle has an effect on an employers right to recover
liquidated damages for delayed completion and, thus
far, it has been the most effective and most used defence
against the imposition of liquidated damages12.
However, it is the view of the judiciary that this principle
could be excluded by express terms in the contract13.
In Percy Bilton Ltd v Greater London Council14, the
conditions of contract of which was the RIBA form of
contract 1963 edition15, Lord Fraser of Tullybelton said:


(1) The general rule is that the main contractor is
bound to complete the work by the date for completion
stated in the contract. If he fails to do so, he will be
liable for liquidated damages to the employer. (2)
That is, subject to the exception that the employer is
not entitled to liquidated damages if by his acts or
omissions he has prevented the main contractor from
completing his work by completion date (3) These
general rules may be amended by the express terms of
the contract. (4) In this case, the express terms of Clause
23 of the contract do affect the general rule.
Similar views were expressed by Judges Brooking and
Cole in their judgements in SMK16 Cabinets and Turner
Corporation Ltd (Receiver and Manager Appointed) v
Austotel Pty Ltd17 respectively.

2. Operation of the Principle


It is evident from the above judgments that in the absence
of an extension of the time clause which specifically
provides for extensions due to acts of prevention, an
employer will lose its right to claim liquidated damages
for delay if that delay was caused by an act of prevention
by the employer. In such a situation, the contractor is
required to complete the works within a reasonable
time18.
Variations whether authorised under the original contract
or subsequently agreed are considered as acts of prevention
for the purpose of this principle.

In Holme20, Park J further said:


There is nothing to show that [Holme] entered into


a new contract by which to perform the works in four
months and a half, ending at a later period The
plaintiffs were therefore left at large; and consequently,
they are not to forfeit anything for delay.

Even though time at large is not a legal term, ever


since the proclamation of the judgment of Holme21,
this phrase has been used many a time by contractors,
where they have been prevented from completing the
works by the completion dates by acts or omissions of
employers, claiming that there is no set contractual date
for completion22.
The decision of Holme 23 has been upheld in a number
of subsequent cases24 old and new, where acts of
prevention by the employer had caused delays in time for
completion.

A view contrary to that of Holme25 was expressed in
Jones and Another v The President and Scholars of St Johns
College, Oxford 26 and Tew v Newbold-on-Avon School
Board27, where the contractors agreed to complete the
works including additional works within times stipulated
in their contracts.
Notably, in the above two cases the contractors had
agreed to complete extra works in addition to the original
works within the time for completion set in the contracts
and therefore they could not establish that extras ordered
by the employers prevented them from completing the
works by the completion dates.
From the judgments of the rest of the above cases, it
can be further observed that the contract between the
parties either did not contain a provision to extend the
time for completion in the event of prevention by the
employer or despite the presence of such provision it did
not encompass the act of prevention which contributed
to the delay in completion.
The courts have construed the provisions of extension
of time clauses strictly against the employer (contra
proferentem)28 as they are included in the contract by the
employer for its own benefit. On several occasions29 the
courts have criticized the generality or ambiguities in the

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June 2012

SLQS JOURNAL
wording used in extension of time clauses and have held
that wordings such as events beyond the control of the
employer had rendered the liquidated damages regime
inoperable. As stated by Salmon LJ in Peak Construction
(Liverpool) Ltd v McKinney Foundations Ltd 30:

The liquidated damages and extension of time clauses


in printed forms of contract must be construed strictly
contra proferentem. If the employer wishes to recover
liquidated damages for failure by the contractors to
complete on time in spite of the fact that some of the
delay is due to the employers own fault or breach of
contract, then the extension of time clause should
provide, expressly or by necessary inference, for an
extension on account of such a fault or breach on the
part of the employer.

The standard form contracts JCT, ICE, FIDIC, etc.


drafted after the second half of the twentieth century
include provisions to extend the time for completion
for, predominantly, the employer caused delays, thereby
preserving its right to deduct liquidated damages31.
Clause 44.1 of the FIDIC Red Book and other bespoke
forms considered herein32 provides for extending the time
for completion for any delay, impediment or prevention
by the employer, among others.

By introducing a specific provision to extend the time
for the employers delay, impediment or prevention,
these contracts have evaded, to a certain extent33, the
problems encountered in the extension of time provisions
in older standard forms34. Under the provisions of this
clause, the engineer or the employers representative
(in Nakheel Forms) has an obligation to determine the
contractors entitlement to extension of time arising out
of the above situations fairly, in due consultation with the
employer and the contractor. Hence, such determination
of the engineer must reflect its fair perception on, and
evaluation of, the contractors entitlement and its
impartiality in the dealings as required by Clause 2.635
Engineer to Act Impartially. However, with the exception
of Dubai Municipality (DM) and Road and Transport
Authority (RTA) forms, Clause 2.1 Engineers Duties
and Authority - has been substantially modified in
the others to include that the engineer should obtain
prior approval of the employer for such determination.
Such onerous provision has cast serious doubts on the
engineers fairness and impartiality as required by Clause
44.1 in determining the contractors entitlements to time
extensions.

48

The provisions of Clause 44.2 - Contractor to Provide


Notification and Detailed Particulars - of the bespoke
forms oblige the contractor to provide with its detailed
particulars for its claim for an extension of time, reference
to the programme of works that has to be submitted under
Clause 14. This programme relates only to the time for
completion. This fact is confirmed by Clause 14.2, where
it states that if the engineer considers the actual progress
of the works does not conform to the programme, a
revised programme showing the modification to such
programme necessary to achieve completion of the works
within the Time for Completion is to be provided by the
contractor.
Therefore, if no extension of time has been granted
and the time for completion has already passed, which
is a usual situation in many of the contracts in Dubai,
no programme can be submitted or accepted under
the provisions of Clause 14.2. This also entails that the
contractor cannot comply with the requirements of Clause
44.2, thereby preventing it from submitting detailed
particulars in substantiation of its claim. Although there
is no case law regarding the inclusion of reference to the
programme of works in extension of time clauses - most
probably because none of the standard form contracts such
as FIDIC, ICE, or JCT contain references to programme
of works in the extension of time clauses - it is opined that
such inconsistencies would be construed strictly against
the employer under the contra proferentum rule.
A question that has arisen quite often in the application of
the prevention principle is to what extent the employers
act of prevention actually invalidated the liquidated
damages.
Early authority on this point favoured the view that any
act of prevention by the employer invalidated the entire
liquidated damages regime. In Holme36 , the delay in
completion was five weeks; the employer was responsible
for four weeks of delay and the contractor for one week of
delay. The court found that the employer was not entitled
to any liquidated damages due to its act of prevention.
Further, Wallace notes that:

[u]nless there is a sufficiently specific clause, it is not


open to the employer, where the contract date has ceased
to be applicable, to make out a kind of debtor and
creditor account allowing so many days or weeks for
delay caused by himself, and, after crediting that period
to the builder, to seek to charge him with damages at
the liquidated rate for the remainder37.

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More recent authority38 suggests that the employers delay
and the contractors delay could be in some circumstances
divisible for the purposes of determining and enforcing
liquidated damages, but remains circumspect in light
of Peaks39 authority. In Rapid Building Group v Ealing
Family Housing40 , Lloyd LJ remarked that:


[I] was somewhat startled to be told in the course of
the argument that if any part of the delay was caused by
the employer, no matter how slight, then the liquidated
damages clause in the contract ... becomes inoperative.

I can well understand how that must necessarily be so


in a case in which the delay is indivisible But where
there are, as it were, two separate and distinct periods
of delay with two separate causes, and where the dispute
relates only to one of those two causes, then the
employer should be able to claim liquidated damages
in relation to the other period.


Nevertheless, Lloyd LJ went on to note that:

[i]t was common ground before us that is not a


possible view ... in the light of the decision of the Court
of Appeal in Peaks case, and therefore I say no more
about it.


Thus, the classic case of Peak41 remains dominant, and
authorities seem to suggest that where an act of prevention
goes to part of the delay but not to the whole, the entire
liquidated damages clause will be invalidated. This view
has been reinforced in SBS International Pty Ltd42, where
Besanko J held that, in a situation where delay to the
completion date was caused by the contractor as well
as the principal, it was not open to a court to apply the
liquidated damages clause to the delay specifically caused
by the contractor.
A number of Articles in the UAE Civil Code provide the
same comfort to a contractor that the prevention principle
provides. For example, Article 296 provides that:

Any condition purporting to provide exemption from


liability for a harmful act shall be void.


Accordingly, despite an agreement between the parties to
the contrary, either party is liable for its harmful acts or
omissions. Harmful acts, it is opined, include financial
and economic harm in addition to physical harm.

Article 878 provides that:


The contractor shall be liable for any loss or damage


resulting from his act or work whether arising through
his wrongful act or default or not, but he shall not be
liable if it arises out of an event which could not have
been prevented.

Further Article 246(ii) provides that:


The contract must be performed in accordance with


its contents and in a manner consistent with the
requirements of good faith.

The above provisions would ensure that the employer


could not benefit from its own actions in delaying the
works.

3. Notices and Prevention Principle


One of the more contentious issues concerning the
operation of the prevention principle is its interaction
with notice provisions, which are conditions precedent
to the granting of an extension of time. The definition of
a condition precedent notice provision was provided in
Bremer Handelgesellschaft Schaft MBH v Vanden Avenne
Izegem PVBA43 , where the House of Lords held that if
a notice provision were to be considered as a condition
precedent it must state the precise time within which the
notice was to be served and must make plain by express
language that unless the notice was served within that
time, the party required to give notice would lose its right
to an extension of time under the contract.
Thus, the issue is whether the prevention principle is
subject to an administrative act such as the provision
of notice by the contractor or whether it can operate
independently of such procedural requirements of
particular contracts.
Case law on this point has been divided until recently. In
Gaymark v Walter Construction44, the contract provided
that a notice of delay was to be given within 14 days of
the cause of delay arising. The Supreme Court reaffirmed
an arbitral award that found that, even though the
contractor had not complied with notice requirements,
because at least some of the delay was caused by the
employer, the right to claim liquidated damages was lost
and time was set at large. Gaymark45 suggests that the

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June 2012

SLQS JOURNAL
prevention principle overrides conditions precedent. This
view has been subjected to strong academic criticism46. In
a paper47 submitted to the Society of Construction Law
(SCL), Hamish Lal critically analyzed this view referring
to the recent Scottish case of City Inn Ltd v Shepherd
Construction Ltd48. In that he argued that if:
(i) the notice requirements did not place an excessive
burden upon the contractor; and
(ii) there were no ambiguity between the clauses
(bespoke49 and standard);
then the notice provision should prevail over the
prevention principle although there may be some debate
about what constitutes an excessive burden upon the
contractor.
Further, in a recent paper50 submitted to SCL, Lal
justifying his aforesaid proposition said:

The employer may not always know he has caused


delay: indeed the employer allocates the risk of delays,
their identification and assessment to the contractor. It is
unfair and may encourage poor project management to
allow the contractor to simply miss notice requirements
and assert his right to EoTs at times (only) suitable to
him.


He further suggested that jurisprudential tensions
between time-bar clauses and the prevention principle
could be better resolved by arbitrators by adopting one of
the following approaches:

(i) The prevention principle is a rule of construction


and not a rule of law, so that express terms ... can
simply exclude its operation; or
(ii) The prevention principle does not apply, because the
proximate cause of the contractors loss is not the
employer but the contractors own failure to operate
the contractual machinery, so there is no act of
prevention.
The decisions in recent cases51, tacitly endorsing Lals
propositions, have established that notice provisions
which are conditions precedent must be satisfied before
the prevention principle can have application. In Turner
52
, Cole J stated that the builder could not:

50

claim that the act of prevention which would have


entitled it to an extension of the time for Practical
Completion resulted in its inability to complete by that
time. A party to a contract cannot rely upon preventing
conduct of the other party where it failed to exercise a
contractual right which would have negated the affect
[sic] of the preventing conduct.

Recent versions of NEC53 and FIDIC54 have made the


notice provisions conditions precedent and there is a
growing trend to include such provisions in, especially,
bespoke construction contracts55.
Notably, most of the standard form contracts are less
onerous on the notice provisions. For example, FIDIC
forms prior to 1999 and JCT forms do not require
contractors to give delay notices within a specific time
nor do they forfeit contractors right in the event of
failure to notify. In the light of the judgment proclaimed
in Bremer56, it is opined that notice provisions in these
forms may not be construed as conditions precedent.
Clauses 44.2 Contractor to Provide Notification
and Detailed Particulars and 44.3 Interim
Determination of Extension of the bespoke forms
considered here provide times57 for the contractor to
submit notices and detailed particulars. Further, Clause
44.2, with the exception of that in Department of Civil
Aviation (DCA) form, provides, inter alia, that the
engineer or the employers representative should not
make any determination of the contractors entitlement
if it failed to provide notice or detailed particulars within
the stipulated times. In DCA form Clause 44.4 provides
that the contractor shall be deemed to have forfeited his
entitlement to an extension of time if it failed to comply
with any of the provisions of Clauses 44.2 or 44.3. From
these provisions it is evident that the notice provisions
in the bespoke forms have placed an excessive burden
on the contractor by constituting detailed particulars,
which do not have a nexus with notice provision, a
condition precedent to the contractors entitlement
to time extension. As discussed earlier, imposition
of such excessive burden on the contractor by the
notice requirements debar the enforceability of same in
situations where the employers acts of prevention have
delayed the contractors performance.
Although the UAE Civil Code does not specifically provide
for the contractor to notify delays, on some occasions,
such as notifications for an anticipated increase in the

SLQS JOURNAL
Bills of Quantities, the Civil Code demands immediate
notification thereof from the Contractor (Article 886(1)
of the Civil Code refers). Further, as Articles 258 and
259 of the Civil Code uphold the intention of the parties
if they are clearly defined without any ambiguities, it is
opined that condition precedent clauses in a contract
would be upheld under the UAE jurisdiction.
1
2

(1838) 3 M. & W. 387.


Rae, S.W. (2006). Prevention and damages: who takes the
risk for employer delays?. Construction Law Journal. p10 Condition (L6) of A Digest of the Laws of England (1822).
3 Wallace, I.N. Duncan. (1970). Hudsons Building and
Engineering Contracts 10th Edition. Sweet & Maxwell.
p624.
4
[1952] 2 All ER 452.
5 [2004] SASC 151.
6 (1984) V.R. 391.
7 Eggleston, B. (1997). Liquidated Damages and Extension
of Time in Construction Contracts, 2nd Edition. Blackwell
Science. p81.
8
Wallace, I.N. Duncan. op. cit. p624.
9
Rae, S.W. op. cit. p1.
10 SBS International Pty Ltd v Venuti Nominees Pty Ltd [2004]
SASC 151.
11 See Alghussein Establishment v Eton College [1988] 1 WLR
587, HL.
12 Eggleston, B. op. cit. p81.
13 Rae, S.W. op. cit. p1.
14 [1982] 2 All ER 623.
15 Also known as JCT 1963 Edition.
16 SMK Cabinets v Hili Modern Electrics Pty Ltd (1984) V.R.
391.
17 (1997) 13 B.C.L. 378.
18 J and J Fee Ltd v The Express Lift Co Ltd, [1993] 34 ConLR
147.
19 Westwood v Secretary of State for India (1863) 1 New Rep. 262
and Thornhill v Neats (1860) 8 C.B. (N.S.) 831 respectively.
20 Holme v Guppy (1838) 3 M. & W. 397.
21 Ibid.
22 Lowsley, S. & Linnett, C. (2006). About Time Delay Analysis
in Construction. RICS Business Services Limited. P161.
23 Holme v Guppy (1838) 3 M. & W. 397.
24 See Russell v Sa Da Bandeira (1862) 8 C.B.(n.s.) 831, Westwood
v Secretary of State for India (1863) 1 New Rep. 262, Dodd v
Churton [1897] 1 Q.B. 162, Peak Construction (Liverpool)
Ltd v McKinney Foundations Ltd (1970) 1 BLR 111, Trollope
& Colls Ltd v North West Metropolitan Regional Hospital
Board [1973] 1 W.L.R. 601 HL, and Multiplex Constructions
(UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007]
EWHC 447 (TCC).
25 Holme v Guppy (1838) 3 M. & W. 397.
26 (1870-71) L.R. 6 Q.B. 115.
27 (1884) 1 C. & E. 260.
28 Wallace, I.N. Duncan. op. cit. p625.
29 See Wells v Army and Navy Co-op. Society (1902) 86 L.T. 764,
Gallivan v Killarney U.D.C. [1912] 2 L.R. 356, and Bramall &
Ogden Ltd. v Sheffield City Council (1983) 29 BLR 73.

June 2012

30 (1970) 1 BLR 111.


31 Rae, S.W. op. cit. p2.
32 Forms of Contract of Dubai Municipality, Road Transport
Authority, Dubai Properties, Department of Civil Aviation and
Nakheel.
33 Such provision does not cover delay caused by the employers
personnel or agents. Compare provisions of Sub-Clause 44.1(d)
with Sub-Clause 8.4(e) of FIDIC 1999.
34 For example, JCT 1963.
35 Clause 2.7 in DCA Conditions.
36 Holme v Guppy (1838) 3 M. & W. 397.
37 Wallace, I.N. Duncan. op. cit. P625.
38 City Inn Ltd v Shepherd Construction Ltd [2007] CSOH 190.
39 Peak Construction (Liverpool) Ltd v McKinney Foundations
Ltd (1970) 1 BLR 111.
40 (1984) 29 BLR 5.
41 Peak Construction (Liverpool) Ltd v McKinney Foundations
Ltd (1970) 1 BLR 111.
42 SBS International Pty Ltd v Venuti Nominees Pty Ltd [2004]
SASC 151.
43 [1978] 2 Lloyds Rep 109, HL.
44 (1999) 16 BCL 449.
45 Gaymark v Walter Construction (1999) 16 BCL 449.
46 Duncan Wallace, I.N. (2002). Prevention and Liquidated
Damages: A Theory Too Far?. 18 BCL 82.
47 Lal, H. (2002). Extension of Time: The Conflict between the
Prevention Principle. Society of Construction Law, UK. Paper
No. 103.
48 [2001] SCLR 961, Outer House, Court of Session.
49 Both Gaymark and City Inn had bespoke notice clauses.
50 Lal, H. (2007). The Rise and Rise of Time-Bar Clauses for
Contractors Claims: Issues for Construction Arbitrators.
Society of Construction Law, UK. Paper No. 142.
51 See Turner Corporation Ltd (Receiver and Manager Appointed)
v Austotel Pty Ltd (1997) 13 B.C.L. 378, City Inn Ltd v
Shepherd Construction Ltd,[2001] SCLR 961, Outer House,
Court of Session, Multiplex Constructions (UK) Ltd v
Honeywell Control Systems Ltd (No 2) [2007] EWHC 447
(TCC), and Steria Limited v Sigma Wireless Communications
Ltd, [2008] BLR 79.
52 Turner Corporation Ltd (Receiver and Manager Appointed) v
Austotel Pty Ltd (1997) 13 B.C.L. 378.
53 Clause 61.3 of NEC3.
54 Clause 20.1 of FIDIC 1999.
55 The notice provisions in all of the bespoke contracts considered
here are conditions precedent.
56 Bremer Handelgesellschaft Schaft MBH v Vanden Avenne
Izegem PVBA [1978] 2 Lloyds Rep 109, HL.
57 DM, RTA and DP forms: Notice within 28 days after the
arisen of the event, Particulars under clause 44.2, within 28
days after notification; under clause 44.3, in intervals of 28 days
and final particulars within 28 days of the end of the event.
DCA forms: Notice within 7 days after the arisen of the event,
Particulars under clause 44.2, within 28 days after notification;
under clause 44.3, in intervals of 14 days and final particulars
within 14 days after the arisen of the event. Nakheel forms:
Notice within 7 days after the arisen of the event, Particulars
under clause 44.2, within 21 days after notification; under
clause 44.3, in intervals of 28 days and final particulars within
21 days of the end of the event.

51

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SLQS JOURNAL

Drafting a Construction Contract Agreement


Kidneswaran Kajanantha
B. Sc. in QS (Hons.), AAIQS, MRICS

Graduated from the University of Moratuwa, Sri Lanka; has more than 6 years of UAE experience in Quantity
Surveying related Contract Administration, currently working as a Quantity Surveyor for DAMAC Properties
Co. LLC

Introduction

A contract agreement can be in a form of writing, oral


or by action. However, the law does not urge a contract
agreement to be in writing. Parties can make an agreement
by word of mouth. But in the latter case, if it is to be
enforced, at times in a court of law oral contracts raise
some difficulties.
Nevertheless, construction contracts are always in writing.
Now let us look at how the construction contract is to be
drafted. A sound contract agreement shall include eight
(8) major components as follows:
1. The title of the contract agreement
2. The date
3. The names of the parties
4. The preamble
5. The body of the contract (Recitals)
6. Covenant (It is a promise)
7. Terms of the contract
8. Execution

The title

There is no contractual or legal significance in the title


of a contract. As stated earlier, the contract itself need
not be in writing. But, the title in a contract is just for
internal purposes to distinguish one from the many other
contracts that an organization could have entered into.

The date

The significance of the date can be described as follows:


1. As generally people have the habit of putting the
date after their signature and a contract is not signed
by both the parties on a same date, one cannot make
out later what the date of this agreement is.
2. There could be a very important time duration
running from this date like the advance to be paid.

52

3. Most importantly, there are certain things running


from this date which have a Limitation of Time.
Limitation of Time means that the law would not
entertain an action brought by one party under the
contract against the other party after the expiration
of a certain time limit. It varies from the type and
jurisdiction of various contracts. For example,
according to English law, in simple contracts the
time limitation within which a party can bring an
action against the other party is six years whereas
in the specialty contract such time limitation is 12
years.
These are the three significances why a date has to be
included in a contract agreement.

The names of the parties

The significance of stating the names of the parties in


a contract is that there are a lot of other parties that
would be referred to in a contract. For example, in a
construction contract there are the engineer, project
manager, employers representative, subcontractors, etc.
and they are not a party to the contract. In order to
distinguish the contracted parties from other parties we
have to state the parties names in a contract. There is no
privity of contract between one of these parties and any
of the others. The privity of contract is the existence of
a legal relationship in a contract. That means a contract
cannot confer rights or impose obligations arising under
it on any other person except the parties to it.
Please note that when a contract is drafted in this way, i.e.,
in the process of including all the components of a contract
there should not be a full stop in between because they are
not sentences and it will continue until all such sections of a
contract are complete.

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The Preamble

The preamble starts with whereas.. and the purpose of


the preamble is that it states the objective of the document.
It is the introductory part of the contract agreement. We
also use the preamble to say what has happened in the
past prior to the contract being made. This is because
after the preamble starting from the recitals what we
say is that what is going to happen or what each party
going to do in the future. And certain things which have
happened in the past, e.g., The Employer has accepted
the tender before signing the contract can be included
in the preamble. If we want to write something which
must have happened before signing the contract it can be
written as for example It is deemed to be included by the
contractor etc.
Now we come to the first two ingredients of a contract
to make it valid. They are the Offer and the
Acceptance. Before moving on to that, first we have
to understand the following:






Invitation to offer is not an offer.


Offeror is the person who makes the offer.
Offeree is the person to whom the offer is made.
Offeror can include any conditions that he likes to
offer.
The acceptance should be absolute and
unconditional.
Conditional acceptance becomes a counter offer.
In the above circumstance the counter offer has to
be accepted by the offeror; otherwise, there is no
contract formed.

The Recitals and the Covenants

It generally starts with Now this agreement witnesses as


follows.. and then it continues with the Articles.
We start with the word covenant, which is a promise.
Now we write the covenants as In consideration of the
payments to be made by the employer to the contractor as
hereinafter mentioned as the contractor hereby covenants
with the employer to execute and complete the work and
remedy any defects therein.
With this comes the third important ingredient in
a contract without which a contract is invalid. It is
Consideration. The consideration in this context is
money. Consideration could be a kind like constructing
something, could be by action, also by inaction.

Consideration should always move from a promisee


to a promiso.
Promiso is the person who makes the promise.
Promisee is the person to whom the promise is
made.
Therefore, we should understand that the employer
is the promisee here.
Why we have to identify here who is the promiso
and who is the promisee is because it is always the
promisee who would seek a remedy due to breach
of the contract by the promiso by not keeping the
promise.

We still cannot stop with this while drafting a contract


agreement. If we stop with this what will happen is that
the contractor can build the building as how he wants
rather than how the employer would want how it is to be
executed and completed and all that should be written
here. For example, it can be written here as According
to a particular standard (specify a standard) or we can
say that In conformity in all respects to the provisions
of the contract.
Now we complete the sentence and therefore put a full
stop for the first time. By doing so, we tried to tie up
all the sections of a contract from the date to this
covenant.
Is our contract complete now? No, because a contract is
a mutual promise. We have seen only one promise being
made by the contractor. Does the employer promise to
pay here? No. So, that mutual promise can be drafted
in the article as No. two (2). Here we write the article
as The employer hereby covenants to pay the contractor
the consideration with the execution and completion of
the works and remedying any defects therein. So, the
employer is the promiser and the person who will go to
the court to enforce the contract for the breach of promise
is the contractor as he is the promisee here. What the
employer will pay under this promise is the contract sum.
With this we come to the fourth ingredient for a contract
to be valid, which is the Certainty. If it is simply stated
as The employer would pay a sum of money which he
considers payable here there is an uncertainty. In this
case a contract would become void or voidable.

Void: A void contract is invalid from the beginning


after the court declares that it is invalid. So the
parties never had an obligation.

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Voidable: In this contract prior to the date on which


the court declares that the contract is invalid, there
was a contract. Only after that date is the contract
invalid. Therefore the parties accrued right for
entitlements exists.

Therefore, if any of these ingredients are missing, the court


would say that the contract is invalid and depending on
the situation it will also say whether it is void or voidable.
Further, while drafting a construction contract if we
stop with that, what would happen? The employer
would pay only the amount stated in the covenant. If
any variation is instructed the contractor would not get
any further money and so in the case of a claim as well.
In order to address this problem, it can be written in an
unambiguous manner here as for example Dhs. 100
million or any other sum becomes payable in accordance
to the contract.
Having said that, if the contract is for two years the
contractor has to wait for two years until he completes
the whole building to receive even a single dollar from
the employer because according to the law, the employer
doesnt have a liability to pay any money until he gets the
product. It is similar to buying a commodity in a market.
Therefore, if the payment is to be made on an interim
basis or if an advance payment is to be made, it must be
written in the contract.
Now the contract is formed as a mutual promise is there
in place. However, if we want to include further articles
there on time, quality and cost aspects we can keep on
writing in any number of articles. This process is called as
Incorporation.
By undergoing this process we can incorporate other
documents like conditions of contract, specification, etc.
into the contract and make it binding for both parties.
They can be incorporated by adding a further article in
the following manner:
In the next article we can write that the following
documents shall be deemed to form and read and
construed as part of this agreement. Now we can list out
all the documents to be incorporated.

Execution

With that we come to the execution of the contract


document. We can start that with In witness whereof

54

the parties. and then on behalf of each party the


authorized personnel have to sign and stamp.
Let us look at the fifth ingredient of a valid contract,
which is Capacity.
Only those who have the capacity can enter into a
contract. For instance, minors do not have the capacity
to enter into a contract and certified people cannot enter
into a contract as well. When signing on behalf of the
company, a person not authorized by the company
cannot sign a contract. He should posses a Power of
Attorney for signing a contract on behalf of a company. A
senile person (old) cannot enter into a contract.
The law lays down general rules. But, the general rules
have exceptions. When it was said that a contract need
not be in writing it is not that all contracts need not be
in writing. The law requires certain things always to be in
writing. Those dealing with land ownership transfer, land
deeds, etc. should always be in writing to be enforced at
times. So, this is an exception to the general rule. And
similarly, when you say a consideration should be there
and without that there is no contract there are some
exceptional cases where without a consideration still
some contracts are valid.

Terms of the Contract

Let us look at the terms of the contract. They are the things
stated in the two covenants. As we did not state them
there itself we have to write them in a separate document
and incorporate them, e.g., conditions of contract.
Let us assume a third party has drafted them and sent
them to us for scrutiny and now we have to study and
confirm that our companys interests are protected. In
this juncture, what are the things that one is supposed to
look for? For this purpose, let us have a checklist that can
be used for this purpose. Generally, there are three major
areas that we have to look for to check whether the terms
are clearly stated in the document or not, namely, time,
cost and quality.
Time
1. Commencement date We have to see if the
commencement date is stated properly.
2. Time for Completion
3. If the extension of time clause is present.
4. If the penalty clause is present in the contract.
5. Time control procedure.
6. Taking over procedure.

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Price
1. The type of contract (lump sum, re-measurable,
etc.)
2. Payment application and payment certificate
procedure including time limits,
3. Variations and provisional sums
4. Additional cost claims - entitlements and procedures
5. Price control procedure
6. Final account procedure
Quality
1. Drawings and specifications should be clearly
incorporated
2. Sample requirements and how it should be tested
3. Inspection procedures, approvals and rejections,
rectifications and remedies
4. Quality control procedure
5. Contractors liability to maintain the works after
the substantial completion of the project, defects
liability period, etc.
There are certain things that do not fall into these heads
of time, cost and quality. Some of them are as follows:
1. Insurance
If it is not clearly written into the contract the
employer cannot insist on the contractor submitting
insurances. He cannot say that it is normal practice
because sometimes the employer himself arranges
for such insurances. Therefore, the contractor could
refuse to insure saying to the employer that It is
your site and I am building for you, so you had
better insure them.
2. Bonds

For example, the requirement of a performance bond
should be written into the contract. Otherwise, the
employer cannot ask for it later.
3. Subcontractors
Contractors are responsible for the default of
the domestic subcontractors. In FIDIC type of
contracts the contractors are again responsible for
the default of the nominated subcontractors. But in
JCT type of contracts the employers are responsible
for the nominated subcontractors and they can get
the Extension of Time (EOT) for their default. So, it
should be written into the contract. Otherwise, the
situation would be difficult.
4. Language and the law
5. Termination clauses
6. Who is going to administrate the contract?

7.

How is the contract going to be administrated? Can


the responsibilities be delegated? etc.
8. The dispute resolution process.
These are some of the important areas that we have to
look into either when we draft a contract or check a
drafted contract and they are not exhaustive either.
If we dont take care of these requirements written into
the contract then there could be ambiguities at times.
For example, the law applicable should be mentioned in
the contract because the parties are allowed to consider
any law as applicable written into the contract. In the
UAE only the government departments are required to
use the UAE laws but private bodies dont have such
restrictions. If it is not mentioned in the contract and
certain disputes cannot be resolved by the contract itself,
then one has to refer it to the court to decide upon which
law is applicable. In such a circumstance under the
conflict of laws provisions it might take years to come
to a conclusion only about that.
Also, when we draft a contract, consistency needs to be
there. Otherwise, again there could be ambiguities. If a
certain thing is written in a place in one way and in another
place in another way then there will be an ambiguity.
So, drafting a contact is not that easy. However, we do
not need to actually draft them from scratch. There
are various standard forms of contract existing already
drafted by experts and they are recognized over the years
internationally, withstood the test of time, cases have
been decided in the courts and weaknesses are identified.
Therefore, we can use them when we write our own
bespoke style of contracts.
We cannot just take a copy of such a standard form of
contract and include into it as a contract document
because the copy right has been retained by the author. So,
what we can do is that we can incorporate by reference.
There are also guidelines for forming Part II- the
conditions of particular applications of the contract.
The conditions of contract have standard conditions and
certain standard conditions need to be amended to suit
the particular nature of a project.
There are some clauses in the general conditions that
mention As stated in the particular applications of the
contract. These are known as cross-referred clauses. So,
clauses need to be amended in Part II the particular

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SLQS JOURNAL
conditions of contract. Further, it is necessary to modify
all the relevant clauses accordingly to suit the agreed
terms between the parties and the type of contract.
Further, we can add any new clauses if we need to do so in
Part II the particular conditions of contract other than
modifying some of those 210 sub-clauses if we considered
the bespoke document of FIDIC 1987 4th edition
conditions of contract for construction.

Appendix to form of tender

The appendix to the form of tender highlights the key


project information like time, penalties, insurance
requirements, etc. It is filled by the contractor. In some
clauses it refers to certain provisions according to the
Appendix to the form of tender. In that case it is
important to include that information in the Appendix
to the form of tender.
For example, according to Sub-Clause 10.1, of FIDIC
1987 4th edition conditions of contract for construction,
if the contract requires the contractor to submit a
performance security in the sum stated in the Appendix
to tender, and if it is not stated in the Appendix to tender
the value of the bond it could be interpreted that there is
no necessity for a bond. So, these are the areas that need
to be looked into carefully when drafting a contract.
Another example is
Time to Issue Notice to
Commence. As per the above stated FIDIC form of
contract Sub-clause 41.1, it states that the Contractor
shall commence the Works as soon as is reasonably
possible after the receipt by him of a notice to this effect
from the Engineer, which notice shall be issued within
the time stated in the Appendix to tender after the date
of the Letter of Acceptance. Sometimes the Letter of
Acceptance (LOA) could specify a commencement date.
Here, the contractor may argue that the Works cannot
not be started in the absence of a Notice to Commence
as per Sub-clause 41.1. So, if we want to specify the
commencement date in a different manner it should be
stated as Notwithstanding the provision in Sub-Clause
41.1

Dealing with subcontracts

Let us now look at the subcontract. If the main contract


is formed on FIDIC 4th edition then it is recommended
that the FIDIC 4th edition subcontract form be
used. Otherwise, there could be incompatibility in

56

June 2012

terminology. If you use the Institute of Civil Engineers


(ICE) blue form, it defines maintenance period and
maintenance certificate whereas in the FIDIC form
main contract it is defects liability period and defects
liability certificate. So, if the subcontract says that
the subcontractors 2nd half of the retention would be
released after the maintenance certificate issued it means
the subcontractor would never get his retention money.
Why? Because there is nothing called a maintenance
certificate in the FIDIC form of contract. So, we have
to use a subcontract which is compatible with the main
contract in terminology.
One controversial area is whether the penalty to
the subcontractor should be limited to 10% of the
subcontract price or 10% of the main contract price if
the main contractors penalty is 10% of the main contract
price. Let us take this scenario. The consultants invite
tenders to select a nominated subcontractor (NSC) and
the NSC is told about the conditions. And the Appendix
to form of tender is also given and it says the limit of
liquidated damages (LD) is 10% of the sub-contact price.
The subcontractor is selected and the main contractor is
told to take this subcontractor on board and enter into a
subcontract with him. The main contractor would refuse
to do this in the first place. This is because, as per Subclause 59.1, the main contractor can make objection to
nomination of a subcontractor if he is declining to enter
into a subcontract with the main contractor containing
the conditions in line with the main contract. Here,
the Employer has a problem and to overcome that the
employer can compromise with the main contractor
saying that you take this subcontractor on board and if
he defaults I would not penalize you up to 10% of the
contract price and your maximum penalty will be limited
to 10% of the subcontract Price. The law permits that a
main contractor could fine a subcontractor for the same
damages that he has to pay under the main contract. It
could be many times the subcontract price sometimes.
Further, how can the main contractor recover that loss?
As much as possible the main contractor can recover
by encashing the performance security and advance
payment guarantees, hold up all the due money and
the balance payment and for the balance he can sue him
in court. It will be a debt due from the subcontractor
to the main contractor. And in order to tie up with that
the employers and the engineers when they invite NSC
to tender the provisional sum works FIDIC 4th edition

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SLQS JOURNAL
should have been incorporated therein. It doesnt state
what the penalty is or talk about LDs. In addition to that,
the subcontractor should be made available for inspection
of the main contract except the prices and other sensitive,
commercial and confidential matters. Mainly a copy of
the Appendix to tender of the main contract together
with Part II conditions of the main contract should be
provided for the subcontractor during the tender. Further,
the contract says the subcontractor is deemed to have full
knowledge of the provisions of the main contract less
such details of the contractors prices. And it goes on to
state the obligation of the subcontractor. He should not
cause the main contractor to be in breach under the main
contract. And if the subcontractor commits any breaches
of the subcontract he shall indemnify the contractor
against any damages for which the contractor becomes
liable under the main contract as a result of such breaches.
Now we move on to the 6th, 7th and 8th ingredients of
the Contract.
The 6th ingredient of the contract is possibility. A
contract is invalid if parties enter into a contract to do
impossible things.
And then we come to legality, the 7th ingredient. Parties
cannot enter into a contract for any unlawful thing.
And the 8th ingredient of the contract is intention to
create legal relations. In olden days contracts it is stated

in the contract either at the beginning or at the end that it


is the parties intention to be bound by the contract. But,
nowadays the court doesnt look into it in commercial
contracts because parties will enter into a contract to be
legally bound only. But, in domestic types of contracts it
is important to state that. Otherwise it will not be legally
binding.
In addition to these eight ingredients which are necessary
for a contract to be valid in common law jurisdiction, in
the United Arab Emirates one additional requirement
is to have good faith and fair dealings. So, the parties
are required to prove the existence of good faith and fair
dealings in such instances where the other party challenges.
And sometimes because of this necessity for good faith
and fair dealings in this part of the world, consideration
is not much looked into because it is believed that in the
presence of good faith and fair dealings there cannot be a
cheating of that nature.

Reference:

Prof.
Indrawansa
Samaratunga.
Sound
Contract
Administration - Drafting Contract Agreement, delivered at
Al Futtaim Training Centre, Dubai, for the Sri Lankan Quantity
Surveyors, UAE.

Editors Note:

The author has baseed his work on a transcription of the above


seminar conducted by Prof. Indrawansa Samaratunga.

ActionstrengthLtd(t/aVitalResources)vInternationalGlassEngineeringIN.
GL.ENSpA House of Lords 03 April 2003
Summary: Estoppel; oral contracts; enforceability of oral contract of guarantee under Statute of
Frauds 1677.
Abstract: A has agreed to supply labour to enable I to build a factory for G. A appealed against a
Court decision that that evade the effect of the Statute of Frauds 1677 s.4. A creditor cannot claim
that a guarantor should deny from relying on the Statute of Frauds 1677 s.4 by reason of having
encouraged the creditor to act to his damage by a promise to pay.
Held: Dismissed the appeal, that the oral contract of guarantee between A and G was not enforceable
under s.4 of the 1677 Statute, as a written agreement was required for a contract to be enforceable.

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